Treasury, IRS Release FAQ Document on ‘No Tax on Overtime’ Compliance

The U.S. Department of the Treasury and the U.S. Internal Revenue Service (IRS) issued an information document on Friday, Jan. 23, to help employers and their employees navigate seven common questions related to the “no tax on overtime” component of the H.R. 1 law (also known as the One Big Beautiful Bill Act).

HR and total rewards (TR) professionals have been closely monitoring implementation of the law’s “no tax on overtime” and related “no tax on tips” stipulations, given the significant process and compliance ramifications for employee compensation.

In addition to the Jan. 23 frequently asked questions (FAQ) document (Fact Sheet 2026-01), the agencies advised general employers to review the federal government’s published information on overtime, compensation and the affiliated Fair Labor Standards Act (FLSA), and share important details with their impacted workers. Resources include:

• The Department of Labor’s Wage and Hour Division (WHD) Fact Sheets;
• IRS Notice 2025-69, titled “Guidance for Individual Taxpayers Who Received Qualified Tips or Qualified Overtime Compensation in 2025”;
• Overtime Pay: General Guidance; and,
• The Handy Reference Guide to the Fair Labor Standards Act.

The agencies also advised federal government entities to review published guidance for compensating federal employees, including:

• The Office of Personnel Management (OPM) FLSA regulations; and,
• The OPM FLSA fact sheet titled “How to Compute FLSA Overtime Pay”.

The guidance in the answers below is derived from the new Treasury/IRS “no tax on overtime” release.

Question: What is qualified overtime compensation for purposes of the H.R. 1-created tax deduction?

Answer: Qualified overtime compensation is overtime compensation paid to an individual required under Section 7 of the FLSA (29 USC § 207) that exceeds the regular rate at which the individual is employed. For example, if an individual is paid at “one and one-half times” their regular rate for an hour of overtime work as required by the FLSA, the “half” portion of the “one and one-half times” paid for an hour of overtime work is qualified overtime compensation. But, also consider:

• For overtime to be required under the FLSA, it must, among other requirements, be paid to an individual who is both covered by the FLSA and not exempt from the FLSA’s overtime requirement (an FLSA overtime-eligible employee). (The next two questions and answers can be used to determine coverage and exempt status.)
• An individual who is ineligible for overtime under the FLSA does not receive qualified overtime compensation regardless of other laws or circumstances (such as a collective bargaining agreement) providing for overtime pay.
• Individuals eligible for overtime under the FLSA generally must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half times their regular rate of pay. If an individual is eligible for overtime under the FLSA but the individual’s employer pays more than is required under the FLSA, the qualified overtime compensation is limited to the portion of the overtime that is required by the FLSA that is in excess of the regular rate. For example, if an employer pays double the individual’s regular rate for hours worked over 40 in a workweek, only the one-half portion that is relied upon to comply with the FLSA requirement is qualified overtime compensation.

Question: Toward complying with the “no tax on overtime” stipulations within H.R. 1, how do I determine whether an employee (or group of employees) is covered by and not exempt from the FLSA?

Answer: Though it is common for employees working in the U.S. to be covered by the FLSA, there are many exemptions from its overtime premium requirement. Whether an individual is covered by and not exempt under the FLSA is a fact-specific determination that depends on the individual’s occupation, work activities and/or earnings.

Specific information on coverage and exemption under the FLSA can be found on the DOL website, and its documents such as:

• Fact Sheet #14: Coverage Under the Fair Labor Standards Act; and,
• The Handy Reference Guide to the Fair Labor Standards Act.

Question: For federal employees, how do I know whether they are eligible for overtime under the FLSA?

Answer: FLSA eligibility for federal employees is typically documented on the employee’s Standard Form 50, Notification of Personnel Action. See block 35, “FLSA Category”; “E” means exempt or FLSA-ineligible and “N” means nonexempt or FLSA overtime-eligible. Under 29 U.S.C. 204(f), the OPM administers the FLSA for most federal employees.

Although OPM administers the FLSA for most federal employees, there are some exceptions. For example, DOL’s FLSA regulations and guidance cover employees of the Library of Congress, U.S. Postal Service, the Postal Regulatory Commission and Tennessee Valley Authority. Additionally, the Office of Congressional Workplace Rights generally regulates the FLSA for legislative branch employees.

Question: What is the deduction amount? Are there limits to the deduction?

Answer: For eligible employees, the deduction is up to $12,500 of qualified overtime compensation earned for the year per return ($25,000 in the case of a joint return). The deduction is reduced if a taxpayer’s modified adjusted gross income (MAGI) for the tax year exceeds $150,000 ($300,000 for joint filers).

Question: Are there other rules that apply to the deduction?

Answer: Yes, there are two primary rules:

• The employee who received the qualified overtime compensation must have a social security number valid for employment, and that employee must include their social security number on the tax return claiming the deduction.
• If the employee is married (within the meaning of Section 7703 of the Internal Revenue Code), that taxpayer and the taxpayer’s spouse must file a joint return to claim the deduction. If both spouses received qualified overtime compensation, both spouses must have a social security number valid for employment and must include both social security numbers on the tax return claiming the deduction.

Question: Should qualified overtime compensation be separately reported to individuals on Form W-2, Form 1099-NEC or Form 1099-MISC? Doesn’t qualified overtime have to be separately reported for an individual to take the deduction?

Answer: It depends on the tax year.

• For tax year 2025, employers and other payers are not required to report qualified overtime compensation separately on Forms W-2, 1099-NEC and 1099-MISC. For 2025, some employers and other payers may choose to separately report the amount of qualified overtime compensation to employees using Box 14 of Form W-2, or to employees or payees through an online portal or on a separate statement. If individuals do not receive a Form W-2 or other statement from their employer or other payer for tax year 2025 that separately reports the amount of qualified overtime compensation, they may use any of the methods described in Notice 2025-69 and the Instructions to Schedule 1-A that are included in the Instructions for Form 1040 to calculate the amount of qualified overtime compensation.
• For tax years 2026 and later years, employers and other payers are required to separately report qualified overtime compensation. Forms W-2, 1099-NEC and 1099-MISC will be updated to allow employers and other payers to provide separate reporting of an individual’s qualified overtime compensation.

Question: If I did not provide overtime-eligible employees information on how much qualified overtime compensation they received during tax year 2025, how might I help them determine their deduction amount?

Answer: You can share with these employees that they may find more information in the following ways:

• Notice 2025-69 contains information to help individuals determine the deduction for qualified overtime compensation. (See also:  Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025.)
• The Instructions for Schedule 1-A included in the Instructions for Form 1040 contain information that may be helpful in determining the deduction for qualified overtime compensation.
• For overtime-eligible federal employee, special calculation rules may apply. Information can be found in the OPM’s “How to Compute FLSA Overtime Pay”.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Organizational Performance