No Tax on Overtime FAQs

According to both the statutory text of H.R. 1 and IRS Notice 2025-69, qualified overtime compensation is limited to overtime compensation in excess of the individual’s regular rate that is required and paid under 29 USC § 207 (FLSA “Section 7”). The portion of overtime compensation in excess of the individual’s regular rate is known the overtime premium, which according to page 22 of IRS Notice 2025-69 is generally, the “half” portion of the “one and one-half times” overtime rate that is minimally required by the FLSA.  

If employers do not separate out the overtime premium from total overtime compensation, the reasonable methods B and D found on pages 22 and 23 of IRS Notice 2025-69 address how the premium should be calculated.  

Qualified overtime compensation is limited to overtime compensation in excess of the individual’s regular rate that is required and paid under 29 USC § 207 (FLSA “Section 7”). In order for overtime to be required under 29 USC § 207, it must, among other requirements, be paid to an individual who is both covered by and not exempt from the FLSA (an FLSA-eligible employee). IRS Notice 2025-69 page 20 

All public agency employees of a State, a political subdivision of a State, or an interstate government agency are covered by the FLSA under the definition of an “employee engaged in commerce or the production of goods for commerce” in 29 USC § 203(s)(1)(C). DOL FACT SHEET #7 FLSA State and Local Government  

There are state and local government employees, however, that are exempt from the FLSA minimum wage, FLSA overtime requirements or both based on the nature of their employment. For example, state and local government executives, professional and administrative employees who are paid on a salary basis are exempt from FLSA minimum wage and overtime requirements. Public safety officers (firefighters and police) who work in small public departments with less than 5 officers are exempt from overtime requirements. (FLSA Advisor - Exemptions)  

 29 USC § 207(a) requires public agency FLSA-eligible employees receive overtime pay for hours worked over 40 in a workweek at a rate of not less than time and one-half their regular rates of pay.  

There are, however, alternate overtime structures covered under 29 USC § 207 and as such, overtime earned under these alternate structures are eligible for deduction. IRS Notice 2025-69 enumerates the following alternate structures, but qualified overtime compensation is not limited to only these structures. The premium portion of overtime paid under 29 USC § 207 is eligible to be deducted.  

Alternate Structures found at: USCODE-2008-title29-chap8-sec207.pdf 

29 USC § 207(j) -  Employment in hospital or establishment engaged in care of sick, aged, or mentally ill 

Hospitals and residential care establishments may utilize a fixed work period of fourteen consecutive days in lieu of the 40 hour workweek for the purpose of computing overtime. Also known as the  “eight and eighty (8 and 80) exception”, § 207(k) allows employers to pay time and one-half the regular rate for all hours worked over eight in any workday and eighty hours in the fourteen-day period. See Regulations 29 CFR 778.601./DOL Fact Sheet #54 – the Health Care Industry and Calculating Overtime Pay 

 29 USC § 207(k) – Employment by public agency engaged in fire protection or law enforcement activities 

Employees engaged in fire protection or law enforcement may be paid overtime on a "work period" basis. A "work period" may be from 7 consecutive days to 28 consecutive days in length. For work periods of at least 7 but less than 28 days, overtime pay is required when the number of hours worked exceeds the number of hours that bears the same relationship to 212 (fire) or 171 (police) as the number of days in the work period bears to 28. DOL FACT SHEET #8 – Law Enforcement and Fire Protection Employees under FLSA 

29 USC § 207(o)- Compensatory Time 

In lieu of overtime compensation, public agency employees may receive compensatory time off at a rate not less than one and one-half hours for each hour of employment for which overtime compensation is required by this section. 

A teacher is exempt from FLSA overtime requirements if their primary duty is teaching, tutoring, instructing, or lecturing to impart knowledge, and if they are performing that duty as an employee of an educational establishment. 29 CFR 541.303  

Because teachers are exempt from FLSA overtime requirements, overtime compensation paid to teachers required by state law or collective bargaining is not qualified overtime eligible to be deducted.  

No. According to page 20 of IRS Notice 2025-69, “overtime compensation paid to FLSA-ineligible employees is not qualified overtime compensation within the meaning of section 225(c) (the deduction) with respect to such employment, regardless of applicable State law provisions or other circumstances causing these amounts to be paid.”  

The amount of overtime pay due to an employee under the FLSA and under IRS Notice 2025-69 is based on the employee’s regular rate of pay and the number of hours worked in a workweek.   Earnings may be determined on a piece-rate, salary, commission, or some other basis, but in all such cases the overtime pay due must be computed on the basis of the average hourly rate (aka the “regular rate”) derived from such earnings. Regular rate is calculated by dividing the total pay for employment in any workweek by the total number of hours actually worked . DOL FLSA Fact Sheet #56a 

The FLSA (29 USC § 207(e)) provides an exhaustive list of types of payments that are excluded from the regular rate of pay when calculating overtime compensation that includes and is not limited to paid-time-off, sick days and holidays. Unless specifically noted, payments that are excludable from the regular rate may not be credited towards overtime compensation due under the FLSA. DOL FLSA Fact Sheet #56a 

FLSA requires extra premiums that are not considered overtime premiums such as nightshift differentials (whether they take the form of a percentage of the base rate or an addition of so many cents per hour) and premiums paid for hazardous, arduous or dirty work to be included in the regular rate. 29 CFR 778.207(b) 

Total compensation in the workweek (except for statutory exclusions) ÷ Total hours worked in the workweek = Regular Rate for the workweek 

The FLSA does not require employers to give their employees time off for holidays, vacations, or sick leave - either with or without pay. If you allow your employee to take time off for a holiday, a vacation, or because he or she is sick, the time off, even though the employee is paid for the time, is not hours worked and need not be included in the total hours worked for overtime purposes. (FLSA Hours Worked Advisor – Holidays, Vacations and Sick Leave) 

Additionally, according to 29 USC § 207(e), “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause” are excludable from the regular rate and may not be credited towards overtime compensation due under the FLSA. See FAQ 5 on the regular rate of pay.   

Whether or not “on-call time” and “waiting time” are considered hours worked for the purposes is determined on a case-by-case basis in both scenarios.  

“On Call Time”  

An employee who is required to remain on his or her employer’s premises or so close thereto that he or she cannot use the time effectively for his or her own purposes is working while on-call. An employee who is not required to remain on the employer’s premises and is able to use on-call time for personal use is likely not considered working while on-call. However, when an employee is on-call, all time spent responding to calls is hours worked. 

Visit FLSA Hours Worked Advisor – On-Call Time to walk through the factors that determine whether an employee’s on-call time is considered “hours worked.” 

“Waiting Time”  

If an employee is engaged to wait, they are considered to be on duty and their time is hours worked. On the other hand, if the employee is waiting to be engaged, they are considered to be off duty and their time is not hours worked. 

When an employee waiting for work to do while on duty, they are considered to be “engaged to wait” and the time is considered hours worked. For example, a fireman who plays a crossword puzzle while waiting for alarms.  

When an employee is completely relieved from duty long enough to enable them to use the time effectively for their own purpose, is told in advance they may leave the job and are advised of the time they must return to work, they are considered off-duty and the time is not hours worked. For example, a bus driver who is finishes a trip at 12:00pm and is relieved from duty until 6:00pm when they have to make the return trip is considered off-duty and those 6 hours are not considered hours worked.  

Visit FLSA Hours Worked Advisor – Waiting Time to walk through the factors that determine whether an employee’s waiting time is considered “hours worked.” 

A bonus is a payment made in addition to the employee’s regular earnings.  Under the FLSA, all compensation for hours worked, services rendered, or performance is included in the regular rate of pay unless specifically exempted under 29 U.S.C. § 207(e). Non-discretionary bonus, or bonuses that are known and expected, are included in the regular rate and can therefore be credited towards overtime compensation due. Examples of nondiscretionary bonuses that must be included in the regular rate include: 

• Bonuses based on a predetermined formula, such as individual or group production bonuses;
• Bonuses for quality and accuracy of work; 
• Bonuses announced to employees to induce them to work more efficiently;
• Attendance bonuses; and
• Safety bonuses (i.e., number of days without safety incidents). 

Discretionary bonuses, or bonuses made at the sole discretion of the employer, are excludable from the regular rate under 29 U.S.C. § 207(e)(1) and (3). DOL Fact Sheet #56C: Bonuses Under the FLSA  

Because the actual amount of qualified overtime compensation can be underestimated when an employee’s regular rate is increased by a non-discretionary bonus, Method E on page 24 of IRS Notice 2025-69 allows employees to make adjustments to the calculation to take the difference into account.  

29 USC § 207(a) requires, unless exempt, public agency employees receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. See FAQ 1 and FAQ 2. 

Reasonable Methods C and D on page 23 of IRS Notice 2025-69  instructs FLSA-covered employees who receive overtime compensation at a rate in excess of time-and-a-half on how to calculate the deductible overtime premium.  

Under Method C, if the employee is paid over the time-and-a-half rate for hours worked over 40 hours per week in accordance with 29 USC § 207(a) and the employer separates out the employee’s overtime premium from their total overtime compensation, then the employee may multiply the overtime premium by an appropriate fraction to approximate the FLSA overtime premium. For example, if the employee is paid double time, then their FLSA overtime premium would be 1/2 of the premium amount.  

Under Method D, if the employee works over 40 hours per week in accordance with 29 USC § 207(a) and the employer does not separate out the employee’s overtime premium from their total overtime compensation, then the employee may multiply the total overtime compensation by an appropriate fraction to approximate the FLSA overtime premium. For example, if the employee is paid double time, then their FLSA overtime premium would be 1/4 of the total amount.  

Only the premium overtime portion of overtime compensation earned for working more than the FLSA maximum allowable hours under 29 USC § 207 is eligible to be deducted. Generally, this is 40 hours, but police and fire fighters paid on a work period basis have alternate allowable hours based on the length of the work period. See FAQ 1 and FAQ 2. 

The premium overtime earned for working hours below the FLSA maximum amounts is therefore not eligible to be deducted. According to the guidance (IRS Notice 2025-69), the only overtime premium allowable for deduction is on hours worked over the FLSA maximum.  

Example 1. Employee A is a FLSA-covered and non-exempt and works for a county in a non-public safety position and earns overtime at the time-and-a-half rate of $15 for hours worked over 37.5 hours each week. They work 45 hours in a week. 

The premium overtime for hours 38, 39 and 40 is not qualified overtime compensation eligible to be deducted. The premium overtime portion of hours 41-45 worked is qualified overtime compensation. Employee A may deduct $25 of their total overtime compensation.  

Example 2. Employee B is a FLSA-covered firefighter who earns overtime at the time-and-a-half rate of $30 on hours worked over 50 on a 7-day work period. They work 56 hours in a week.  

The premium overtime for hours 51, 52 and 53 is not qualified overtime compensation eligible to be deducted in accordance to § 207(k). The premium overtime portion of hours 54, 55 and 56 worked is qualified overtime compensation. Employee A may deduct $30 of their total overtime compensation.  

No. Only the premium overtime portion of overtime compensation earned for working more than the FLSA maximum allowable hours under 29 USC § 207 is eligible to be deducted. Generally, this is 40 hours, but police and fire fighters paid on a work period basis have alternate allowable hours based on the length of the work period.

Method F on Page 24 of IRS Notice 2025-69 outlines how FLSA-covered employees can use known regular rates and hours worked over 40 per week to calculate qualified overtime compensation. Method F states:

“If the individual is paid overtime compensation at a rate described in paragraphs (A)-(E) above (or at least the FLSA standard time-and-a-half) but does not receive any statement covering the entire 2025 tax year separately accounting for the FLSA Overtime Premium, the aggregate dollar amount of FLSA overtime, or the aggregate dollar amount of overtime compensation paid at a higher rate, the individual may use a reasonable method that takes into account (1) the regular rate under 29 USC § 207(e) paid to the individual by the employer (or a reasonable approximation of this amount), and (2) the individual’s hours of service in excess of 40 hours in a workweek (or a reasonable approximation if the individual does not have records of actual hours of service) for purposes of determining the amount of qualified overtime compensation under section 225(c) (the deduction). A reasonable method includes requesting information from the individual’s employer and using the information provided by the employer for purposes of calculating the deduction.” 

29 USC § 207(o) allows state and local government employees to receive compensatory time in lieu of overtime compensation as wages. Under 29 USC § 207(o), compensatory time must be earned at a rate of one-and-a-half hours for each hour of employment for which overtime compensation is required by 29 USC § 207.  The overtime premium as it relates to compensatory time is the additional half hour portion of the one-and-a-half hour rate.  

29 USC § 207(o)(7)(B) defines the terms “compensatory time” and “compensatory time off” as “hours during which an employee is not working, which are not counted as hours worked during the applicable workweek or other work period for purposes of overtime compensation, and for which the employee is compensated at the employee’s regular rate.”  

29 USC § 207(o)(3)(A) of the FLSA provides that an employee of a public agency which is a State, a political subdivision of a State, or an interstate governmental agency who is engaged in “public safety”, “emergency response”, or “seasonal” activity, is limited to accruing no more than 480-hours of compensatory time off. Employees whose work does not regularly involve “seasonal”, “emergency response”, or “public safety” activities are subject to a 240-hour compensatory time accrual limit for FLSA overtime hours. Compensatory time accrued over the 480-hour and 240-hour thresholds must be paid as overtime compensation.  

Payments for accrued compensatory time earned may be made at any time. Upon termination of the employee, unused compensatory time must be paid out for unused compensatory time off at a rate not less than the average regular rate of the employee during the last 3 years of employment or the employee’s final regular rate. 29 CFR 553.27 

Other Compensatory time 

Compensatory time which is earned and accrued by an employee working hours which are “overtime” hours under State or local law, ordinance, or other provisions, but which are not overtime hours under section 7 of the FLSA is considered “other” compensatory time. 29 CFR 553.28 

For example, a local law or ordinance may provide that compensatory time be granted to employees for hours worked in excess of 35 in a workweek. Under section 7(a) of the FLSA, only hours worked in excess of 40 in a workweek are overtime hours which must be compensated at one and one-half times the regular rate of pay, so compensatory time earned for hours 36, 37, 38, 39 and 40 worked would be considered “other compensatory time” and not eligible for deduction. See FAQ 10 on calculating qualified overtime in situations where the employer’s policy is more generous than FLSA.  

Method G on page 25 of IRS Notice 2025-69 states that if employer satisfies the requirements under 29 USC § 207 by operation of another subsection of the FLSA other than 29 USC § 207(a) (including but not limited to public sector employees in fire protection and law enforcement (29 USC § 207(k)), employees of a political subdivision of a State or an interstate governmental agency who receives compensatory time off in certain circumstances in lieu of cash overtime compensation (29 USC § 207(o)), and employees of hospitals or certain residential care facilities (29 USC § 207(j)), the individual must compute the amount of overtime compensation by operation of the different overtime rules used in the relevant provision of 29 USC § 207 that apply to the individual and may use any reasonable method contained in this notice that takes those alternative overtime rules into account. See FAQ 2 for information on how overtime is earned under these alternative structures.  

Footnote 18 on page 18 states that “overtime amounts described in 29 USC § 207(o) must be properly included on the employee’s Form W-2 to be considered qualified overtime compensation. Accordingly, individuals receiving compensatory time under 29 USC § 207(o)(3)(B) in satisfaction of overtime amounts due under 29 USC § 207 may take the overtime amount into account for purposes of the deduction only in the year the compensatory time is paid.”  The overtime premium as it relates to compensatory time is the additional half hour portion of the one-and-a-half hour rate. 

29 USC § 207(o)(3)(B) states that “if compensation is paid to an employee for accrued compensatory time off, such compensation shall be paid at the regular rate earned by the employee at the time the employee receives such payment.”  

The guidance provides Example 6 on pages 28 and 29 of IRS Notice 2025-69 to illustrate how qualified overtime can be computed taking into account compensatory time under  29 USC § 207(o). 

Example 6. Individual D works for a State or local government agency that gives compensatory time at a rate of one and one-half hours for each overtime hour worked under 29 USC 207(o). In 2025, Individual D was paid wages of $4,500 with respect to compensatory time off taken in accordance with section 207(o). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual D may include $1,500, one-third of these wages for purposes of determining qualified overtime compensation under the deduction.  

Yes. The text of HR 1 requires employers to report qualified overtime compensation on appropriate tax forms like the employees’ W2 or furnish employees with statements separately accounting for qualified overtime compensation.    

On November 5, the IRS announced relief for employers in reporting qualified overtime compensation on official tax statements (IRS Notice 2025-62), like Form W-2 for tax year/calendar year 2025. Employers may still choose to provide employees with estimates of qualified overtime pay this year, but this is optional and at the discretion of the employer in tax year/calendar year 2025.  

IRS Notice 2025-69 instructs employers who wish to report qualified overtime on official tax statements in 2025 to use Box 14 on the W-2. The IRS does not provide codes or guidance on reporting qualified overtime compensation in Box 14 for 2025 since there is reporting relief in 2025. 

The only information we have regarding relief is articulated fully in IRS Notice 2024-62 that was published on November 5. The guidance is specifically directed toward employers’ relief from penalty for not providing employees with qualified overtime on appropriate tax forms  or other statements separately accounting for qualified overtime. Employees still may need additional information from their employers to accurately represent their qualified overtime compensation when reporting on their 2025 tax forms depending on what information will be made or is already made available to them. 

The guidance for individual taxpayers (IRS Notice 2025-69) that was published on November 21 clarifies that individuals who are not furnished a separate accounting of qualified overtime compensation in box 14 of Form W-2 (or on a separate statement) in 2025 must make a reasonable effort to determine whether they are considered FLSA-eligible employees, which may include asking their employers or other service recipients about their status under the FLSA. 

Pages 25 and 26 of IRS Notice 2025-69 states:  

“The Treasury Department and the IRS are aware that documents such as earnings statements and pay stubs take a variety of forms, and employers and other service recipients provide overtime compensation in a variety of ways (including, for example, combining State-required and FLSA-required overtime). Individuals may use the amounts reported as overtime compensation on earnings statements, pay stubs, and other documentation provided by payors to calculate the FLSA Overtime Premium for 2025. For example, individuals may approximate the amounts of FLSA Overtime Premium by using overtime amounts reported on a pay statement or similar document that covers all wages paid in 2025…In all cases, individuals must maintain copies of any documents they rely on in accordance with IRS recordkeeping requirements.” 

Footnote 20 on page 26 of IRS Notice 2025-69 states that taxpayers claiming the deduction on their tax return must demonstrate they meet the requirements of section 225 (the deduction) and establish that they are entitled to the deduction as well as determine the appropriate amount of the deduction.  

At this time, the IRS has only provided guidance granting relief to employers in 2025 (IRS Notice 2025-62) and guidance for claiming the deduction in 2025 for employees (IRS Notice 2025-69). The IRS has not yet released guidance for employer’s reporting requirements associated with the deduction in tax years 2026-2028. 

Throughout the FAQs, we reference the following documents and resources:

IRS Guidance

• IRS Notice 2025-62: Relief from Certain Penalties Related to Information Reporting Required in Connection with No Tax on Tips and Overtime
• IRS Notice 2025-69: Guidance for Individual Taxpayers who received Qualified Tips or Qualified Overtime Compensation in 2025 

Fair Labor Standards Act (FLSA)

• 29 U.S. Code § 207 - Maximum hours
• 29 Code of Federal Regulations Part 778

FLSA Resources

• FLSA Advisor Main Menu
• FLSA Hours Worked Advisor
• DOL FLSA Fact Sheet #7 FLSA State and Local Government
• DOL FLSA Fact Sheet #8 – Law Enforcement and Fire Protection Employees under FLSA
• DOL FLSA Fact Sheet #54 – the Health Care Industry and Calculating Overtime Pay
• DOL FLSA Fact Sheet #56a: Overview of the Regular Rate of Pay under the FLSA