New IRS Fact Sheet Helps with Overtime Deductions
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IRS Updates Guidance on Overtime Deduction
Workers eligible for a federal tax break on overtime pay may claim it more easily for 2026. This contrasts with their experience on their 2025 returns. The change reflects new rules for 2026 through 2028. The IRS issued a new fact sheet on the overtime compensation deduction. Furthermore, it is the individual income tax deduction for qualified overtime. The fact sheet adds more detailed rules for 2026 through 2028.
The IRS also updated its frequently asked questions on overtime deductions to clarify and expand the information previously provided. They are hopeful it will ease confusion about the deduction. The confusion concerns the deduction for 2025 tax returns filed earlier this year.
Many employers and workers were unsure about overtime eligibility. They were unclear on the reporting required of employers. Employers will now be required to include the information on workers’’ W-2s for the 2026 tax year. This means taxpayers won’t be responsible for determining eligibility. They won’t be calculating their own deduction, as many did for their 2025 return.
Origin of the No Tax on Overtime Break
The bill titled One Big Beautiful Bill Act includes the no tax on overtime tax break. It was signed into law in July 2025. For the tax break, eligible workers can deduct a portion — up to $12,500 for single tax filers or $25,000 for married couples filing jointly — of qualifying overtime on their tax return. The deduction applies to overtime pay covered under the Fair Labor Standards Act, which says nonexempt employees must be paid at least 1.5 times their normal pay rate for time worked beyond 40 hours per week.
However, the deduction is only for the “overtime premium” — the one-half portion of that 1.5 rate. For illustration: If a covered worker’s regular hourly rate is $40, and their overtime rate is $60 per hour, only the $20 premium — the amount above the regular rate — counts toward the deduction. The tax break starts phasing out at incomes of $150,000 for single taxpayers and $300,000 for joint tax returns.
The updated IRS FAQs include the requirement that employers put the amount eligible for the deduction on workers’ W-2s, in box 12 using a “TT” code. While it’s possible for an independent contractor to receive a 1099-MISC or 1099-NEC that includes eligible overtime pay, it would be “rare” circumstances causing that, according to the IRS.
The FAQs also clarify that if state law or union agreement requires overtime pay that is different from the FLSA, only the portion mandated under the FLSA qualifies — generally the extra half in the 1.5 times pay rule — for the deduction.
Average deduction for 2025 was more than $3,100.
More than 29 million taxpayers claimed the deduction for overtime wages in the latest tax season through the April 15 filing deadline, according to a July 2 release from the Treasury Department. The average deduction was above $3,100, the release says. Additionally, 75% of those filers had income under $100,000 and 96% had income under $200,000.
For help with your taxes or clarifying this deduction, contact us at (312) 578-9300 or info@madonia.com.