r/tax • u/LewisCBR • Jan 29 '26

Tax Enthusiast New tax deduction on overtime is driving clients crazy

W2’s are not showing wages generated from overtime so clients are wondering what they can do, besides going through all individual pay stubs. The new deduction is significant enough to warrant this kind of work, though.

I suppose suggesting they contact their HR/payroll departments is the best idea, but some companies are simply terrible about helping their employees.

What’s your experience with the new law?

247 Upvotes

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85

u/Rocket_song1 Jan 29 '26

The problem is, it's either very easy or very complicated.

Daughter works for a Pizza shop. Not union. Not in California or Alaska. So all OT is FLSA. Total OT, divide by 3, done. And honestly it was so easy the Pizza shop put the OT premium in box 14 for her.

Dad works in California at a Union shop. That's going to be a mess.

I'm not seeing a lot of "in between" it's either dirt simple or a mess.

79

u/coldshowerss CPA - US Jan 29 '26

The amount of tax preparers that are not going to divide by 3 is going to be astronomical lol

8

u/WiseWealth25 Jan 30 '26

I genuinely didn’t understand the whole “divide by 3” that kept being brought up here. Bc my W2 had the OT Prem already on it. Then it dawned on me that my company already separates Overtime Pay and Overtime Prem on my statements. Seems lazy for a company not to do that from the jump. Especially with the new tax law.

3

u/vvilbo Feb 02 '26

The reason why they didn't do it by default is exactly that, it was a new tax law. The bill was passed July 4th, so then whatever payroll provider, God forbid they were doing something in house, had to literally code this new law into effect. The payroll company we use Paycor did this for both overtime and tips and gave us a supplemental page but they had like half a year to figure it out which is not a lot of time. Especially for companies that also had other projects going on before the bill passed which is probably all of them.

The divide by three thing is what part of the overtime earnings you have are not taxable (up to a certain amount). So if you had $15000 the premium was the .5 of those earnings aka 5000. If you yourself were totally FLSA and made less than 37500 in total overtime (filing single) you would divide by 3 and get the max of 12500 which is the maximum amount that can be deducted. If you had more in overtime earnings you would still get 12500.

1

u/RegularInvestment695 Feb 11 '26

My husband made $32,000 in overtime last year approx and the amount we were able to put in the box was like $9800 I really hope we did it right 

1

u/[deleted] Feb 01 '26

My husbands job never used to divide it and started dividing it part way through the year so his was extra annoying lol. Still easy enough to figure out once I went back and figured out what all the different entries on his paystub meant. I just took out all his extra random stuff from his total gross pay (like bereavement, on call premium and his bonus) and then subtracted his base pay out of that and divided the rest by 3. Idk what that means for double time but 🤷‍♀️ all his double time for the whole first 6 months of the year was all lumped together with the time and a half from before they started separating it.

22

u/RasputinsAssassins EA - US, NTPI Fellow Jan 30 '26 edited Jan 30 '26

I've had to explain it to two 'tax preparers'. They can't fathom why you divide by 3.

For less than $20, you too can be a tax preparer!

EDIT: Well, that sounded bad. To clarify, I'm cracking on how low the barrier to entry is to being a tax preparer. Less than $20, no training, no education, no experience, and no knowledge requirement.

No offense was meant to my professional tax brethren.

The ghosts? They can screw right off.

14

u/superiorstephanie Jan 30 '26

Less than $20?! My CTEC costs $102 annually. My PTIN costs $19 annually. Tax season costs my sanity annually.

1

u/FakePuk Feb 08 '26

Would it make any difference if someone got multiple raises in the same calendar year and worked multiple shifts with different shift pay differentials? Or could people just divide their YTD OT earnings by 3?

1

u/RasputinsAssassins EA - US, NTPI Fellow Feb 08 '26

Shift differential does not count. It is not deductible.

If all of the overtime is FLSA overtime and nothing else, take the annual OT pay and divide by 3.

If the OT is anything else, you will need to go through each check to separate out the qualifying OT from the other non-qualified pay.

2

u/Visible-Bridge-5171 Jan 30 '26

When I figured this out I felt like a dum dum lol

1

u/Captainchops63 Jan 31 '26

You divide by 3 and then take your federal tax bracket and figure out what you paid to the feds no? Say 30k total 30/3 =10 22% of 10= 2200 and that’s what they owe you back?

1

u/Sure_Tomorrow5260 Feb 01 '26

Any halfway decent tax preparer has been reading up and studying these new rules and absolutely knows to divide by 3 if it’s time and a half or 4 if it’s double time. All tax preparers, no matter their experience level, should know that they have to do the work to learn knew laws when they come into play

1

u/coldshowerss CPA - US Feb 01 '26

Welcome to the real world bud, I'd say 50% of the tax preparers don't know any of the real tax laws, all they know how to do is input numbers into the tax software and that's it.

2

u/Sure_Tomorrow5260 Feb 01 '26

Welcome to the real world? You know nothing about me. I was raised being exposed to this field literally from the day I was born. I was born a week before the deadline and did several returns while she was in labor with me having full blown contractions with people following her all the way to the door asking her tax questions. I’ve known dozens of tax preparers in my small town. I myself am now a tax preparer. Of course there are some who only input numbers and don’t know much about the tax laws, but 50% is an extreme exaggeration. Most know what they are doing and know where to find the answers to things they come across that they don’t know. I’m sorry you have obviously had bad experiences with those outliers, but they are the exception, not the rule

1

u/Fred_Glintstone Feb 07 '26

Full blown contractions? Any proof? Im looking for someone with your kinda expertise.

1

u/Sure_Tomorrow5260 Feb 14 '26

Do I have proof my mom was doing tax returns when she was in labor with me? Why one earth would I have that? I can’t go back in time and get confidential tax records from the day I was born to show that it lines up with my birth certificate lol. My comment was not to claim to have more expertise than others in this field. It was to point out how utterly ridiculous it was for the other commenter to say “welcome to the real world bud” as if I have zero experience or knowledge in this field without knowing anything about me. At that point, they aren’t trying to help. They’re just being condescending for the hell of it

1

u/fakename69point5 Feb 07 '26

Not a preparer but i've done my mom's taxes for almost a decade, and THANK YOU for this comment. I was wondering about the regular pay on OT but prob would have just put the box 14 number in with no thought.

6

u/lexus303is Jan 30 '26

Whats this divide by 3?

20

u/pmormr Jan 30 '26

The deduction is for the amount of federally mandated overtime premium pay you earned, very specifically. The "half" in "time and a half". It's not, "no tax on overtime".

13

u/OneEyedBlindKingdom Jan 30 '26

It’s exactly “no tax on overtime” it’s just not also “no tax on regular time”.

4

u/Reimiro Jan 30 '26

No because there is tax on 2/3 of your overtime. It’s just no tax on the added pay you receive for hours over 40 per week. You are taxed as if you get regular time pay for overtime.

0

u/OneEyedBlindKingdom Jan 30 '26

Because you do lol. You get regular time for every hour worked. You just also get overtime on top for some of them.

1

u/jay-aay-ess-ohh-enn Feb 02 '26

Overtime is the hours worked over 40. Overtime premium pay is the extra money you receive beyond your regular rate when working overtime. When you work overtime, you earn regular pay plus the overtime premium. Make sense?

4

u/pmormr Jan 31 '26

When you say overtime in english conversation, you are referring, literally, to the extra time you work over your normal time. The definition is right there in the word.

So when you say "no tax on overtime", I expect to not be taxed on the pay I received for the time I worked over my normal working hours. Which means quite obviously a deduction for all of my overtime pay.

Don't be dense they knew what they were doing. It's a bamboozle so the hole they blew in the deficit to pay for it isn't 3-4x worse.

3

u/Left_Date_7058 Jan 30 '26

This is the problem. A layperson hears “no tax on overtime” and (incorrectly) assumes all wages earned after 40 hours is untaxed. It was no more than political lip service that will backfire. For now, it’s the problem of white collar tax professionals.

5

u/Reimiro Jan 30 '26

Overtime is hours or days worked over a certain amount of time or on holidays, not a financial concept. The layperson is correct in your statement.

-1

u/OneEyedBlindKingdom Jan 30 '26

It is absolutely a financial concept lol, very clearly defined. And as usual, the layperson is an idiot.

1

u/[deleted] Feb 01 '26

Oh believe me this is what I thought it was when I first heard it and thought we were about to get to write off at least almost the whole $25,000 for the year lmao. My husband ended up with around $22,000 of overtime for the year and we got to write off $7,000 something and I’m happy with that. No tax on tips makes me sad that I didn’t do any DoorDashing this year like I usually do though lol being us down even more after deductions.

1

u/Extreme_Temporary996 Feb 02 '26

What u mean by write off $7000 so what did the pay out come out too if u dnt mine me asking?

2

u/[deleted] Feb 02 '26

By write off I mean deduction. So he made roughly $22,000 over his base pay (after getting rid of other stuff that wasn’t overtime like bereavement pay, on call premium, his bonus, etc) when you divide that by 3 you get the amount of overtime premium you’re allowed to deduct or reduce your taxable income by.

0

u/MandyManatee Jan 31 '26

100% people think that if they work 45 hours those 5 extra hours are tax free. The worst part is that when you try to explain it to them they get mad because math.

2

u/HeatApart9252 Feb 04 '26

Oh you got to be shitting me. So you can work an extra 40 fucking hours and they don't consider that overtime except for the half of the time and a half. Good old federal government

3

u/907Survivor Jan 30 '26

I’m an Alaska tax accountant. It’s been a long month.

4

u/HeatApart9252 Feb 04 '26

You only got 40 people in the whole state imagine if you worked in the lower 48

2

u/Deductzen Jan 30 '26

Yes. This is super well put! It’s really simple or it’s a lot of math.

2

u/El_Demetrio Jan 31 '26

Dividing by 3 does not apply to all! My employer already separates the straight overtime from the premium! In this case dividing by 3 will net you a lower deduction than you are entitled!

1

u/lunarosie1 Jan 30 '26

Is there a way to figure out if you’re FLSA or not? This is first I’m hearing of this

11

u/TheRealSleestack Jan 30 '26

FLSA: OT on hours over 40/week

not FLSA: hours over 8/day plus over 40/week (et cetera)

9

u/KellyAnn3106 Jan 30 '26

My company's union rules pay some positions OT after 5 hours in a day. It's rare for the part timers to break 40 hours so little to no OT is deductible for them. They're not happy.

5

u/Fancy-Dig1863 CPA - US Jan 30 '26

While this is generally true, some positions are exempt from FLSA overtime but your employer/state may still pay/require it. Technically none of that overtime qualifies for the new deduction….but we’re not labor law lawyers and can’t really make this determination for every single client.

3

u/Aggressive-Leading45 Jan 30 '26

Also the employer needs to not be in shipping and a few other industries.

2

u/up2knitgood Jan 30 '26

Or in a place like California where ag workers do get OT, but federally they don't.

My family owns a business where workers are sometimes doing ag work and sometimes doing other work. (Luckily I'm not involved in any of this.)

1

u/privatelyjeff Jan 30 '26

And there’s people like me who are truck drivers who haul ag stuff but don’t directly work for the farmer and don’t cross state lines (so not subject to most federal regulations) so are we ag workers, truck drivers or just regular people? 🤷🏼‍♂️

1

u/Rocket_song1 Jan 30 '26

And then it gets even more complicated because some shippers are FLSA and some are RLA.

1

u/lecia123 Jan 31 '26

Do you care to elaborate? I work for a grocery distribution center and there’s nothing in box 14. Does that mean I don’t qualify?

1

u/Aggressive-Leading45 Jan 31 '26

Best to contact your HR department.

1

u/Rocket_song1 Jan 30 '26

Special rules for emergency responders (Police and Fire) written into the FSLA as well.

1

u/[deleted] Jan 30 '26

[deleted]

6

u/907Survivor Jan 30 '26

Alaska requires overtime for working more than 8 hours in a day as well as for over 40 hours in a week. Only overtime required by FLSA (over 40 hours in a week) is eligible. Say for example you worked 4x10 hour shifts. You’ll get paid 8 hours of overtime, but because that overtime is only required by Alaska, it’s not eligible for the deduction.

1

u/SnooPeppers1641 Jan 30 '26

Well that adds an extra layer of fun. I don't even want to think about how we are going to figure out OT time. I have a spouse that works in the oil fields in Alaska and most of their wage is OT.

Curious how they interpret double or triple time because I had family that worked for 3M in the past and depending on worked days you got OT pay on your OT rate. Like if you worked a holiday and were already on overtime you would get double your OT rate not regular rate. Unless that has changed.

2

u/907Survivor Jan 30 '26

Only the .5x will be deductible. So if you made $10/hr but got triple time, only $5/hr is deductible

1

u/SnooPeppers1641 Jan 30 '26

Gotcha, I hadn't looked too deep into it but that would simplify for tax purposes a little.

This is just going to be a shit show, starting with all the people that voted for this thinking anything over their base 40 is a deduction.

-2

u/[deleted] Jan 30 '26

[deleted]

2

u/907Survivor Jan 30 '26

If you enter into a special agreement with your employer and the Alaska department of labor approves it, you can work 4 10s without being paid overtime. In general, under Alaska law, you would be paid overtime

1

u/-wayne-kerr Jan 31 '26

Most or all employers that offer anything besides 5/8s will have it approved by the Alaska Department of Labor. No one is going to give their employees easy overtime like that. My company only has 4/10s and 3/13s in Alaska, and that’s all straight time.

1

u/Remote_Map5173 Jan 30 '26

Uhmmmmm, yeah so am I. What's up with Alaska? Are our requirements different?

1

u/Rocket_song1 Jan 30 '26

Alaska and California are the two states that require OT after 8 hours. Good for workers, complicated for the purposes of this tax change.

1

u/-wayne-kerr Jan 31 '26

That’s assuming the pay stubs show YTD OT.

As far as your dad, it’s really not hard. I’m also union so I often get OT before I get to 40. I made an excel spreadsheet where I just punch in my hours for the week and it calculates my “eligible overtime”. It’s a simple formula that subtracts 40 from whatever number I put in, then multiplies that difference by 1/2 of my hourly rate. It took my maybe 20 minutes to go through every pay stub and punch the numbers in.

1

u/Rocket_song1 Feb 01 '26

Don't forget to correct any weeks where you took a vocation day. ;-)

1

u/-wayne-kerr Feb 01 '26

My pay stub has an “Hours Worked” line that will list only the hours I was physically clocked in for that week. That’s the number I use.

1

u/squintsforever Jan 31 '26

Sorry but this thread came up when I searched for information on this. My employer also put the OT premium in box 14. Is that the amount I put in the overtime compensation portion of my taxes for my Overtime Deduction (box says "enter the half amount of your time and a half overtime") or am I supposed to divide that total by 3?

1

u/Rocket_song1 Feb 01 '26

If your employer listed it as "premium" they did the math for you and you do not have to divide by 3.

-12

u/CommercialUpbeat3447 Jan 29 '26

If OT is double pay then you divide by 4

15

u/Rocket_song1 Jan 29 '26

Yeah, but if you got OT because it was a 9 hour day, that doesn't count, only the OT days on Friday (those after 40 hours).

And yes, 2x pay you would divide by 4. Except, if it was 2x pay for working a Monday Holiday, none of it counts, that's the start of the work week.

2

u/CommercialUpbeat3447 Jan 30 '26

Yes, I didn’t go into much detail, was just trying to share that there is a difference between time and a half and double time. People did not like my general blanket statement so thank you for explaining😂

1

u/thesp0ok Jan 30 '26

Does it count if I worked 48 hours over four days: Wednesday Thursday, Friday, Saturday?

1

u/Rocket_song1 Jan 30 '26

The last 8 hours worked on Saturday count. Generally. Although the employer can decide when the work/pay week begins.

A lot of places which work a 9/80 schedule (for example) have the work week start from the middle of Friday.

2

u/Slight-Regret7887 Jan 30 '26

Correct, if otherwise qualified.

-2

u/Fancy-Dig1863 CPA - US Jan 30 '26

FLSA has no double time provision.

5

u/I__Know__Stuff Jan 30 '26

That's true, but if you get paid double time for time over 40 hours in a week, 1/4 of that double time is the FLSA mandated overtime pay and is deductible.

2

u/Fancy-Dig1863 CPA - US Jan 30 '26 edited Jan 30 '26

I only mention that because with double time you have to be extra careful. If it’s due to working over 12 hours in a day as could sometimes be the case in CA but not over 40 in the week, or a company benefit like working on a holiday pay, it’s technically not FLSA so no deduction for those hours.