Millions of hourly workers who logged extra shifts in 2025 now stand to reclaim a slice of those earnings at tax time. A new above-the-line deduction lets eligible employees write off up to $12,500 of qualified overtime pay, or $25,000 for joint filers, on returns filed for tax years 2025 through 2028. The catch: only the premium half of time-and-a-half pay counts, the overtime must be required under the Fair Labor Standards Act, and it has to show up on a W-2. For workers whose pay stubs lump all hours together, claiming the break will demand extra legwork.
A four-year window for FLSA overtime, and why the clock is ticking
According to the U.S. Government Publishing Office, Public Law 119-21 created Internal Revenue Code Section 225, the statutory backbone of the deduction. The provision is temporary: it covers tax years 2025 through 2028, giving workers a narrow window to benefit. The deduction is not a credit and does not reduce payroll taxes. Instead, it lowers adjusted gross income, which can ripple into other tax calculations such as eligibility for education credits, child-related benefits, or health-insurance premium subsidies tied to income.
The definition of “qualified overtime compensation” is narrow by design. Under FLSA rules, employers must pay at least one-and-a-half times the regular rate for hours worked beyond 40 in a single workweek. The deduction covers only the premium portion, meaning the extra half above the regular rate, not the full overtime check. A nurse earning $40 an hour who works 10 overtime hours collects $600 in total overtime pay, but only $200 of that, the premium half, qualifies for the write-off. Workers whose income exceeds the law’s modified adjusted gross income thresholds will see the deduction phased down or eliminated, limiting the benefit primarily to low- and middle‑income households that rely on overtime to boost take‑home pay.
Because the deduction is “above the line,” taxpayers do not need to itemize to claim it. That makes the provision particularly valuable for hourly employees who take the standard deduction but still want credit for the cost of working extra shifts. However, the four-year sunset means that employees who regularly work mandated overtime have a finite period in which to adjust withholding, track records, and potentially increase retirement contributions to make the most of the lower taxable income.
IRS guidance splits 2025 from later years on reporting rules
Treasury and the IRS released Notice 2025‑69, announced in IR‑2025‑114, to spell out how workers should handle the deduction on their 2025 returns. In that guidance, described on an IRS page for individuals who received overtime, officials acknowledged a real‑world problem: many employers did not separately itemize FLSA overtime on 2025 Forms W‑2 because the law had not yet taken effect when payroll systems were configured for the year. As a result, box 1 wages may simply reflect a blended total of regular and overtime pay, with no clear breakout of the premium portion that actually qualifies for the deduction.
The IRS addressed situations where the W‑2 does not break out qualified overtime, signaling that workers may need to rely on pay records to calculate the premium portion themselves for the 2025 filing year. Employees may use year‑end pay statements, employer-provided summaries, or other payroll records to determine how many hours exceeded 40 in a workweek and what part of their pay represents the extra half‑time. The agency’s guidance emphasizes that taxpayers must be able to substantiate their numbers if questioned, which means retaining copies of pay stubs and any employer correspondence used to compute the deduction.
For 2026 and beyond, the picture changes. Per the Government Publishing Office, the statute amends Internal Revenue Code Section 6051 to require that qualified overtime compensation appear on specified payee statements, including Forms W‑2. That means employers will have to separately report the portion of FLSA overtime that counts for the deduction, reducing guesswork for employees and tax preparers. Clearer reporting should also help the IRS verify claims and reduce the risk of audits focused on overtime calculations.
To help both workers and employers prepare for this shift, the IRS later published a set of frequently asked questions explaining how the new deduction operates in practice. The FAQs walk through examples of how to determine the premium portion of overtime, clarify that only FLSA‑mandated overtime qualifies, and address coordination issues when a worker holds multiple jobs. They also reiterate that the deduction is capped per taxpayer, not per employer, so individuals with several part‑time positions must aggregate all qualified overtime before applying the annual limit.
For hourly employees, the practical takeaway is straightforward but time‑sensitive. In the early years of the deduction, especially for 2025, workers will need to be proactive about gathering records and, if necessary, asking payroll departments to help identify FLSA overtime embedded in their pay. As reporting requirements tighten from 2026 onward, the process should become more automated, but the underlying opportunity remains the same: a chance to reduce taxable income by carving out the premium pay earned from long weeks on the job. With the provision scheduled to expire after 2028, those who routinely work overtime have only a few filing seasons to capture the full benefit.
