Qualified Overtime Deduction
Who Is Eligible
- Must have SSN valid for employment by due date of return.
- The overtime earner must be subject to the Fair Labor Standards Act (FLSA); that is, covered by the Act (also called non-exempt).
- Most hourly employees are non-exempt, meaning that they are covered by FLSA.
- If a taxpayer is unsure whether they are exempt or non-exempt, they can check with their employer. Tax-Aide should not attempt to make that determination.
What Qualifies
- Qualified overtime premium
- Defined as overtime pay that exceeds the regular rate of pay as is required by the FLSA but limited to the 1⁄2 time pay over regular pay as required by FLSA
- Taxpayers who receive compensatory time off in lieu of cash payment are also eligible for the deduction if the time off represents an overtime premium. In other words, their employer must allow at least 1 1⁄2 hours off for each overtime hour worked.
- An employer may provide the qualified overtime eligible for the deduction.
- Even though not required by IRS for TY2025, the employer can show the qualified overtime on the W-2 issued to the employee.
- This could be in box 12 with code TT or in box 14 with a description. It may
also be on a separate statement.
- If not provided by the employer, the overtime premium eligible for the deduction can be computed by the taxpayer when they have sufficient information. While Counselors may assist with simply mathematics, it is the taxpayer’s responsibility to determine their eligibility and the amount of their deduction.
- For example, the taxpayer may be able to use another statement (such as a pay stub) if they know their total overtime pay and have a constant rate of overtime (such as 11⁄2, double time, etc.).
- F1040 instructions allow a taxpayer to use any reasonable method to compute the amount of overtime that is eligible for the overtime deduction.
- The employee needs to retain the documents that they use to make their calculation.
- The overtime pay amount must be included in the totals on a W-2 (box 1, wages). For those rare
employees who are allowed to be treated as independent workers, the overtime pay must be included on Form 1099-NEC (box 1, nonemployee compensation), or Form 1099-MISC (box 3, other income).
How to Report in TaxSlayer
- Federal → Deductions → Additional Deductions → No Tax on Overtime
- Box 1: Qualified overtime compensation included on Form W2, box 1.
- Box 2: Qualified overtime compensation included on Form 1099-NEC, 1099-MISC.
Limitations
- Maximum annual deduction is $12,500 ($25,000 if MFJ). If MFJ, there is just one overall limit of $25,000 which can be filled by one spouse or both spouses combined..
- MFS not eligible.
- Phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
- For every $1,000 of MAGI above the applicable threshold, the maximum allowable deduction is reduced by $100.
- For a single filer, the deduction is completely eliminated at $400,000 MAGI.
- For married couples filing jointly, the deduction is completely eliminated at $550,000 MAGI.
