2025 Overtime Premium Pay Deduction
Beginning with tax year 2025 through 2028, there is a new temporary deduction up to $12,500 ($25,000 if married filing jointly) for "qualified overtime compensation" received during the year. It can be claimed whether itemizing deductions or using the standard deduction.
Qualified Overtime Compensation is defined as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed. For example, an hourly employee has a regular pay rate of $20.00. The overtime pay rate is $30.00. The maximum amount of qualified overtime compensation that can be deducted is $10.00 ($30.00 - $20.00).
This deduction gets reduced once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 if married filing jointly). The qualified overtime compensation deduction will be reduced by $100 for each $1,000 MAGI exceeds the amounts shown above.
For tax year 2025, individuals cannot claim the overtime premium pay deduction if they are considered highly compensated employees or have earned income exceeding $160,000.
This deduction can only be claimed on the income tax return if the total amount of qualified overtime compensation is reported separately on Form W-2 or Form 1099. The IRS will provide transition relief for tax year 2025 for individuals claiming the deduction and for employers and payors subject to the new reporting requirements.
A valid work-eligible Social Security number is required to claim this deduction. If married filing jointly, both spouses must have valid work-eligible Social Security numbers.
NOTE: If an individual is using the "Married Filing Separately" filing status, this deduction CANNOT be claimed.
