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No Tax on Overtime and Tips: IRS Fact Sheet Covers Overtime FAQs
This IRS fact sheet provides answers to frequently asked questions about the new deduction for qualified overtime compensation.
On Jan. 23, the IRS released Fact Sheet 2026-01, which answers frequently asked questions about the new deduction for qualified overtime compensation. The fact sheet explains who may be eligible to claim the deduction and where to find additional information on eligibility and other rules.
What qualifies as overtime compensation
In most cases, qualified overtime compensation includes overtime pay required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay.
For example, if an individual is paid at “one and one-half times” their regular rate for overtime hours, as required by the FLSA, the additional “half” portion qualifies as overtime compensation under the deduction.
Limits when overtime pay exceeds FLSA requirements
If an individual is eligible for overtime under the FLSA but is paid more than the law requires, the qualified overtime compensation is limited to the portion required by the FLSA that exceeds the regular rate of pay.
Labor agreements or city policy may provide more generous overtime pay than the FLSA requires. In those cases, not all premium pay may qualify. For example, if an employer pays double the employee’s regular rate for hours worked over 40 in a workweek, only the additional one-half portion qualifies as overtime compensation.
Determining FLSA coverage
Whether an individual is covered by, and not exempt from, the FLSA is a fact-specific determination. Coverage depends on factors such as the individual’s occupation, work duties, and/or earnings.
More information on FLSA coverage and exemptions is available on the U.S. Department of Labor website, including Fact Sheet No. 14: Coverage Under the Fair Labor Standards Act, and Item No. 8 in the Handy Reference Guide to the Fair Labor Standards Act.
Reporting requirements for employers
For tax year 2025, employers and other payers are not required to separately report qualified overtime compensation. Forms W-2, 1099-NEC, and 1099-MISC will be updated to allow for this separate reporting. Additional guidance is provided in Notice 2025-62 (pdf).
Beginning with tax years 2026, employers and other payers must separately report qualified overtime compensation. Forms W-2, 1099-NEC, and 1099-MISC will be updated to allow employers and other payers to provide separate reporting of an individual’s qualified overtime compensation.
Additional resources
Additional information is available from the IRS:
More information on the FLSA is available at: