Member Alert: IRS Unveils “No Tax on Overtime” Guidance

The Internal Revenue Service (IRS) published guidance for employees to deduct qualified overtime compensation from federally taxable income, also known as “no tax on tips,” beginning in 2025. Read the guidance here.

This new, temporary deduction will have significant implications for government finance officers as governmental entities are one of our nation’s largest employers and adhere to a combination of federal, state and local regulations on overtime pay.

Key Highlights

• To access the deduction, employees must be FLSA-covered and non-exempt. Deduction not available for overtime paid voluntarily or under state law if not required by FLSA.
• Overtime amounts above FLSA requirement (e.g., double time beyond required premium) are not deductible
• The guidance takes into account FLSA-covered overtime based on work periods rather than a 40-hour work week
• State and local government employees who were paid compensatory time in 2025 in lieu of cash payments for overtime can incorporate this time into their calculation.
• For 2025, employers are not required to separately report qualified overtime on Form W-2 or 1099, in line with prior IRS guidance. IRS allows employees to use alternative documentation (pay stubs, payroll statements) to calculate the amount.
• The guidance provides calculation methodology for employees to calculate qualified overtime pay in 2025 if separate accounting of FLSA and non-FLSA overtime is provided