The new “no tax on overtime” deduction has left many workers asking what actually qualifies. The IRS answered some of those questions in Notice 2025-69, and the details matter for anyone who regularly works more than 40 hours a week.
What the deduction is
The One Big Beautiful Bill Act created a deduction for qualified overtime compensation for tax years 2025 through 2028. The deduction is capped at $12,500 per year, or $25,000 for joint filers, and it phases out at higher incomes. Taxpayers who file as married filing separately are not eligible.
Only the overtime premium qualifies
Qualified overtime compensation is limited to overtime required by section 7 of the Fair Labor Standards Act (FLSA) that exceeds your regular rate. In plain terms, that is the “half” in time-and-a-half. Your regular hourly pay for those overtime hours does not count, and neither does extra pay your employer offers beyond what the FLSA requires. Overtime paid for hours that are not eligible for the FLSA premium also falls outside the deduction.
How to figure the amount for 2025
Because 2025 W-2 forms were not updated to report qualified overtime separately, Notice 2025-69, released November 21, 2025, explains how workers can calculate the amount themselves. The IRS gave a simple example: if an employee was paid $15,000 in overtime at time-and-a-half, one-third of that, or $5,000, is the FLSA premium that can be included.
Why accurate overtime pay matters more now
The deduction only helps if you were paid overtime correctly in the first place. Employers who misclassify workers as exempt, fail to count off-the-clock work, or leave bonuses out of the regular rate can shortchange both your paycheck and your tax deduction.
- Review your pay stubs for overtime hours and rates.
- Keep your own record of hours worked.
- Ask your employer or tax preparer how overtime was reported.
If you believe you were not paid the overtime you earned, speak with an overtime lawyer about recovering unpaid wages.
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This article is general information, not legal advice. Every case depends on its own facts, so talk to an employment lawyer about your situation.
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