For federal tax years 2025–28, an eligible worker may deduct qualified overtime compensation, generally the premium above regular hourly pay required by the Fair Labor Standards Act. In a standard time-and-a-half case, the “extra half” can qualify, while the base hourly pay for the overtime hours does not. IRS guidance sets out reporting, statutory and phase-out rules.
Sarah's 50-hour week
Sarah earns $30 per regular hour and works 50 hours. Her first 40 hours pay $1,200. Ten overtime hours at $45 pay $450, consisting of $300 base-rate wages and $150 FLSA overtime premium. Thus $150 is the week's potentially qualified overtime amount. If she repeats exactly that week for 48 weeks, the premium totals $7,200—below the $12,500 individual annual cap. The deduction is not the full $450 overtime wage or a guaranteed $1,584 tax refund.
Caps and phase-out
The annual deduction ceiling is $12,500, or $25,000 on a joint return, before reduction when modified AGI exceeds $150,000 or $300,000 for joint filers. Eligible amounts must be properly reported, and the worker needs a valid SSN; married claimants must file jointly. The IRS Schedule 1-A deduction lowers taxable income after AGI, whether the standard deduction or itemised deductions are used.
Not every overtime-looking payment qualifies
The deduction is tied to overtime required by federal FLSA rules. Extra pay solely under a state law, employer policy or union agreement may not qualify to the extent above the FLSA-required premium. Independent contractors who are not FLSA employees generally do not earn FLSA overtime compensation, but reporting may be on W-2, Form 1099 or another specified statement in particular cases; “only W-2” is too broad a rule.
