What Counts as Qualified Overtime? The FLSA Test, Explained

The single most common misunderstanding about the "no tax on overtime" deduction is the assumption that all overtime pay qualifies. It does not. The statute ties the deduction to one specific federal law, and overtime that exists for any other reason, however real the hours were, falls outside it. This article answers the eligibility questions one at a time, using the definitions the IRS has published in its questions-and-answers guidance and in Notice 2025-69 on IRS.gov. For the caps and the household math across all four new deductions, start with the pillar guide.

What does the law actually mean by "qualified overtime compensation"?

For tax years 2025 through 2028, qualified overtime compensation is overtime pay that is required by section 7 of the Fair Labor Standards Act, the federal wage law usually shortened to FLSA, and only the portion of that pay that exceeds your regular rate. Section 7 is the rule that requires covered employers to pay non-exempt workers at least one and a half times their regular rate for hours beyond 40 in a workweek. The deduction therefore has two gates: the overtime must be FLSA-required, and only the premium slice of it is deductible.

Why does only the "half" of time-and-a-half count?

Because the first "one" of time-and-a-half is just your ordinary wage, which you would have been paid for any hour of work. The deduction is aimed at the extra half that federal law forces the employer to add. If your regular rate is $20 and your overtime rate is $30, the qualified amount is the $10 premium per overtime hour, not the whole $30. A worker with 200 federal overtime hours at that wage has 200 times $10, or $2,000 of potentially deductible premium, even though the overtime paychecks totaled $6,000.

Does overtime required by state law count?

Generally no, and this surprises a lot of people in daily-overtime states. IRS guidance is explicit that overtime not required by FLSA section 7 is not qualified, and it names the common cases: overtime required only by a state law, overtime promised in a collective bargaining agreement, and overtime an employer simply chooses to pay. A worker who earns daily overtime after an eight-hour day under a state rule, but never crosses 40 hours in the week, has no FLSA-required overtime that week and therefore no qualified amount. When state and federal rules both apply to the same hours, the premium the FLSA itself requires is the part that can qualify.

What about double time or extra-generous overtime rates?

The same premium logic caps the answer. The FLSA requires one and a half times the regular rate; anything above that is contractual generosity, not a federal requirement. If your employer pays double time, the deductible premium is still measured by what section 7 requires, which is the half-time premium over your regular rate, not the full extra 100 percent you actually received. The extra pay is welcome, but the portion beyond the federally required premium is ordinary taxable wages.

I am salaried and exempt. Do I have qualified overtime?

Almost certainly not. Exempt employees, such as many salaried executive, administrative, and professional workers, are the people the FLSA's overtime requirement does not cover. If federal law never required your employer to pay you an overtime premium, there is no FLSA section 7 amount to deduct, even if you worked sixty-hour weeks or received extra pay for them. The deduction follows the legal requirement, not the effort.

Where do I find my qualified overtime number?

For tax year 2026, the redesigned Form W-2 gives it to you directly: employers report total qualified overtime compensation in box 12 with code TT. For tax year 2025, the first year of the deduction, the IRS granted employers transition relief, so many 2025 W-2 forms will not break the premium out separately. Notice 2025-69 on IRS.gov addresses that gap by allowing individuals to use a reasonable method to figure their 2025 qualified amount from the records they have, such as pay stubs that show overtime hours and rates. Keeping those stubs matters; the companion article on recordkeeping covers what to save.

How large can the deduction be, and who can claim it?

For tax years 2025 through 2028 the deduction is capped at $12,500 for a single filer and $25,000 on a joint return. It phases out by $100 for every $1,000 of modified adjusted gross income above $150,000 (single) or $300,000 (joint); the mechanics of that reduction are worked through in income phaseouts and MAGI. You need a valid Social Security number, and married taxpayers must file jointly to claim it, a wrinkle explored in filing jointly vs separately. You can claim it whether or not you itemize.

Does claiming the overtime deduction affect the tips deduction?

No. They are separate deductions with separate caps, and one worker can qualify for both in the same year, a tipped employee who also works federal overtime being the obvious case. Each is computed on its own terms, and both are claimed on the same new IRS schedule. Note also that the overtime deduction reduces income tax only; Social Security and Medicare taxes still apply to overtime wages in full.

General information, not tax advice

This article is general information about the definition of qualified overtime compensation for tax years 2025 through 2028 and is not tax advice. The controlling definitions come from the statute and from IRS guidance, including the IRS questions and answers and Notice 2025-69 on IRS.gov, and guidance can change. Confirm current rules at IRS.gov and consult a qualified tax professional about your own situation before you file.