The Internal Revenue Service has released updated guidance on the overtime tax deduction that was established under legislation signed into law in July 2025. The clarifications address confusion that arose when workers filed their 2025 tax returns earlier this year, particularly regarding which types of overtime qualify and what reporting obligations employers must fulfill.
The overtime deduction allows eligible workers to exclude a portion of their overtime earnings from taxable income, specifically the premium paid above their regular hourly rate. Single filers can deduct up to $12,500 annually, while married couples filing jointly can deduct up to $25,000. The deduction applies only to overtime compensation covered under federal wage-and-hour law, which mandates that nonexempt employees receive 1.5 times their regular pay rate for hours worked beyond 40 per week. The tax benefit phases out for higher-income earners, beginning at $150,000 for single taxpayers and $300,000 for joint returns.
A significant change for the current tax year involves employer reporting requirements. Beginning with the 2026 tax year, employers must include the eligible overtime deduction amount on workers’ W-2 forms using a designated code. During the 2025 tax season, the Treasury Department and IRS waived this requirement because reporting systems had not yet been updated. Consequently, many workers previously had to calculate their own deductible amounts based on pay stubs, which created opportunities for calculation errors.
According to Treasury Department data, more than 29 million taxpayers claimed the overtime deduction during the previous filing season, with an average deduction exceeding $3,100. The overwhelming majority of claimants—96 percent—reported income below $200,000. Tax professionals advise workers to verify that the amounts reported by employers on their W-2 forms are accurate and to request corrected statements if discrepancies are discovered. Workers cannot independently adjust deduction amounts on their tax returns if they believe employer-reported figures are incorrect.
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