New Tax Deduction for Qualified Overtime Compensation

The One, Big, Beautiful Bill Act created a new tax deduction for qualified overtime compensation.

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Recently, the IRS issued a list of frequently asked questions regarding this tax deduction. A few important questions and answers are summarized below; a more detailed list can be found here.

  • What qualified overtime can be used for the deduction? Qualified overtime is compensation paid to an individual that exceeds the regular rate at which the individual is employed. Qualified overtime is only the amount paid in excess of the standard rate. This overtime pay must generally be for hours worked in excess of 40 in a workweek at not less than one and one-half times their regular rate of pay. If overtime is paid in excess of this rate, generally only the one-half portion is qualified overtime.
  • What is the maximum deduction amount? The maximum deduction amount is $25,000 for individuals filing a married filing joint return and $12,500 for all others.
  • Is there a maximum income threshold? The deduction is reduced if income exceeds $300,000 for individuals filing a married filing joint return and $150,000 for all others.
  • How will qualified overtime compensation be reported to the individuals? For tax year 2025, employers and other payers are not required to report the amount of overtime. If a taxpayer received overtime pay, they must use the instructions to Schedule 1-A to calculate their overtime pay. For tax years 2026 and later, employers and other payers are required to report the qualified overtime separately. Forms W-2, 1099-NEC, or 1099-MISC will be updated to include this information.

These changes can affect many business and individual taxpayers. If you have any further questions on any of these, please contact your tax advisor.

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