IRS Guidance on Qualified Overtime Deductions for 2025: Key Rules and Reporting Tips

Starting in 2025, the One Big Beautiful Bill Act introduced a new federal income tax deduction for qualified overtime pay. Eligible employees can deduct up to $12,500 (or $25,000 for joint filers) from their taxable income. This deduction phases out for taxpayers with modified adjusted gross income over $150,000 (or $300,000 for joint filers).

Because the deduction applies retroactively to January 1, 2025, the IRS issued transition rules to help employers and payroll providers adjust reporting systems. Notice 2025-62 provides relief from penalties for incorrect or missing information during this transition. Recently, the IRS issued Notice 2025-69, which clarifies how individual taxpayers can claim the deduction.

Who Is Eligible?

Only employees covered by, and not exempt from, the Fair Labor Standards Act (FLSA) overtime rules qualify. Employees typically exempt from FLSA include those in administrative, professional, executive, computer, or outside sales roles who earn above the salary threshold.

What Counts as Qualified Overtime Compensation?

To claim the deduction for qualified overtime on their individual income tax returns, employees must first determine their qualified overtime compensation. “Qualified overtime compensation” is defined as required overtime compensation paid to an individual that exceeds the regular rate at which the individual is employed.

Reporting and Documentation for 2025

Although employers are not required to separately report qualified overtime on 2025 Forms W-2 or 1099, employers may voluntarily provide this information.

The IRS states that employers may furnish overtime information in Box 14 of the W-2, which is the recommended and cleanest option for employees. Additionally, employers can provide a year-end summary letter or statement with the overtime figures.

Because separate reporting is optional, employees may need to calculate their qualified overtime using reasonable methods. Individuals may use any of the following reasonable methods to determine their qualified overtime compensation:

1. Individuals who receive a pay statement that specifically identifies the “half” portion of the 1.5× overtime rate for the full 2025 year may use that figure.
2. Individuals who receive a pay statement that shows the full amount of overtime (i.e., does not separate out the 0.5× overtime premium) may use one-third of the full amount of overtime reported on their pay statement.
3. Individuals paid more than 1.5× their regular rate for overtime hours may follow the guidance in (1) and (2) but use the appropriate fraction to determine their overtime. For example, if overtime is paid at a rate of 2× the regular rate and is specifically identified on the statement (method 1), the appropriate fraction is one-half.
4. Individuals who do not have a full-year statement that reports overtime may use a reasonable method based on their regular rate and hours worked over 40 per week, supported by available records.

Additional methods and examples can be found in Notice 2025-69.

For assistance with compliance and implementation, employers are advised to consult their payroll service providers and tax professionals. Please do not hesitate to contact us if you have any questions.