Handling the 2025 Overtime Deduction

For tax year 2025, eligible individuals may claim an above-the-line deduction for qualified overtime compensation, subject to statutory limits and income phaseouts. 

Because IRS forms were not updated for tax year 2025, the IRS issued transitional guidance for employers. Employers are not required to separately report qualified overtime compensation on 2025 forms, and no penalties apply as long as the base filing is complete and accurate. 

However, the IRS encourages employers to provide qualified overtime information to employees using secure methods such as: 

• An online payroll portal 
• A written or digital year-end statement 
• Box 14 of the Form W-2 

Dedicated W-2 reporting codes for qualified overtime will begin in tax year 2026. 

The most common point of confusion: only the FLSA overtime premium qualifies for the deduction. 

• Qualifies: the premium portion of FLSA-mandated overtime (generally the extra 0.5× paid on hours worked over 40 in a workweek) 
• Does not qualify: the straight-time portion of overtime pay, daily overtime, double-time, or overtime that is not required under the Fair Labor Standards Act (FLSA) 

Beginning in tax year 2026, employers will be required to report the total amount of qualified overtime compensation separately. 

For tax year 2025, the IRS allows employers to determine qualified overtime premium amounts for their employees using existing records and reasonable methods. Examples include: 

• A separate “overtime premium” figure, if your payroll system already tracks it 
• One-third of total overtime pay, when overtime is paid at time-and-a-half (1.5×), since the premium represents one-third of the total overtime amount 
• Calculations based on actual overtime hours × regular rate, when no annual summary or premium breakout exists 

The IRS emphasizes that reasonable, well-documented methods are acceptable during this transition year. 

• Confirm your payroll setup separates FLSA overtime from other overtime types, using distinct earning codes where possible 
• Decide how you will provide qualified overtime information to employees for 2025 (Box 14 or a separate statement are both acceptable) 
• Document your calculation methodology and retain supporting payroll records in case of employee or auditor questions 

Providing clear, consistent overtime premium information now helps employees claim the deduction and positions your payroll process for mandatory reporting in 2026.