On July 4, 2025, the One Big Beautiful Bill Act was signed into law. One of its provisions created a new federal tax deduction related to certain overtime pay earned during 2025.

If you are eligible for overtime under the Fair Labor Standards Act (FLSA), you may be able to deduct a portion of your overtime earnings when filing your 2025 federal income tax return.

Here Are The Highlights

• Employers are not required to provide special overtime reporting for this deduction in 2025.
• According toIRS Notice 2025-69, employees may use overtime amounts shown on their pay stubs to calculate the deduction.
• The deduction applies only to the overtime premium portion (the extra 0.5 rate), not the full 1.5× overtime rate shown on your pay stub.
• Employees are responsible for determining and claiming the deduction when filing their tax return.

How to Estimate Your Qualified Overtime Amount

Qualified overtime compensation is based on the FLSA overtime premium — the additional one-half (½) rate paid for hours worked over 40 in a workweek.

For a simplified estimate:

1. Locate your Year-to-Date Overtime Earnings on your final 2025 pay stub
2. Divide that total by 3

Example

OT Earnings:  $9000

$7500 / 3 = $3000

Qualified Overtime Amount:  $3000

Important note: The ÷3 method is a simplified estimate that generally applies when overtime is paid at 1.5× the regular rate and reported as a single overtime earnings total. If your pay includes double time, blended rates, shift differentials, bonuses that affect the regular rate, or other special calculations, you should rely on IRS guidance and/or consult a qualified tax professional.

Additional Resources

For full details on qualified overtime and related tax treatment, please review the official IRS guidance:
https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025

2025–2026 Withholding Considerations

If employees would like to adjust theirfederal withholding going forward, they may submit a new 2026 Form W-4 (Employee’s Withholding Certificate).

• If no new W-4 is submitted, withholding will continue based on your current form
• The W-4 instructions include a Deductions Worksheet that can be used to reflect this overtime deduction in Step 4(b)

You can access the 2026 Form W-4 here:
https://www.irs.gov/pub/irs-pdf/fw4.pdf

The IRS Tax Withholding Estimator is also available; however, it has only been updated to reflect the increased standard deduction and child tax credit:
https://www.irs.gov/individuals/tax-withholding-estimator

Important Reminder

We are not certified tax professionals. This information is provided for general awareness only and should not be considered tax advice. Because individual tax situations vary, we strongly encourage you to consult a qualified tax professional before making tax-related decisions.