Qualified Overtime: What We Need From You

For tax years 2025 through 2028, eligible employees may claim a federal income tax deduction for qualified overtime compensation, capped at $12,500 for single filers and $25,000 for joint filers, with a phase-out that begins at $150,000 of modified adjusted gross income ($300,000 joint).

The deduction is claimed by the employee on their return. Your obligation as the employer is reporting: we must be able to tell the IRS how much of each employee's pay was qualified overtime compensation.

Qualified overtime compensation is the amount paid ABOVE the employee's regular rate of pay because overtime was required by section 7 of the Fair Labor Standards Act. For classic time-and-a-half, that means only the extra 'half' is qualified — not the full 1.5x amount.

Example: an employee with a $20.00 regular rate works 45 hours. The 5 overtime hours pay $30.00/hour, or $150.00. Of that, $100.00 is straight-time value and $50.00 is the overtime premium. Only the $50.00 is qualified overtime compensation.

These amounts are excluded from qualified overtime compensation:

The FLSA regular rate is not always the base hourly rate. Nondiscretionary bonuses, shift differentials, commissions, and certain other payments must be blended into the regular rate, which changes the size of the overtime premium — and therefore the reportable amount.

If your payroll includes production bonuses, attendance bonuses, commissions, or piece-rate work, tell us. Retroactive regular-rate recalculations after year end are the most common cause of amended W-2s.

We need to know exactly how overtime is calculated in your organization so the premium can be isolated cleanly for the full year, including pay already processed.