The Internal Revenue Service (IRS) published guidance for employees to deduct qualified overtime compensation from federally taxable income, also known as “no tax on overtime,” 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
Additional Resources
Webinar: Implementing "No Tax on Overtime" for Government Employers