IRS Issues Guidance Regarding Overtime Tax Deduction

The IRS has issued Notice 2025-69, which guides workers eligible to claim the One Big Beautiful Bill Act (OBBBA) deduction for overtime compensation for tax year 2025. The notice clarifies the method by which workers may determine the allowable deduction amount in the absence of a separate employer-level accounting of qualified overtime on information returns such as Forms W-2 or 1099, which will remain unchanged for the 2025 tax year. This guidance complements Notice 2025-62, released on November 5, which affords employers penalty relief in tax year 2025 from the new overtime-related information reporting requirements and confirms that employers and other payors will not incur penalties for failing to separately report the total amount of qualified overtime compensation.

The IRS clarifies that the OBBBA deduction applies to an individual who is both covered by and not exempt from the Fair Labor Standards Act (FLSA), and not to overtime paid to FLSA-ineligible employees under state law or to premium rates paid for certain work.  Because employers and other payors will not be required to separately account for qualified overtime compensation under the November 5 guidance, a separate accounting may not appear on the W-2 or written statements furnished to individuals for tax year 2025. Specifically regarding overtime in respect to a collective bargaining agreement, the notice states:

Some employers or other service recipients, on their own initiative, under a collective bargaining agreement with a labor union, and/or under State law, may provide overtime pay that is not required by 29 USC § 207. For example, an employer may choose to pay a higher overtime amount than the one and one-half times an individual’s regular rate of pay that is generally required by the FLSA (e.g., the employer may choose to pay double time for hours worked over 40 in a workweek) or they may choose to pay employees an extra amount to work on weekends or holidays. In such cases, while the additional one-half times portion required by the FLSA may be qualified overtime, payments in excess of the FLSA-required premium are not.