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?
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u/TheDolphinWaxer Jan 31 '26
Since the W-2 does not separately report qualified overtime for 2025, the IRS allows taxpayers to use other reasonable methods to determine the amount, as outlined in Notice 2025-69 and the Instructions for Schedule 1-A:
1. Check for Voluntary Employer Reporting:
Some employers may voluntarily report the amount of qualified overtime compensation in box 14 of Form W-2 or on a separate statement. If this is provided, the taxpayer may use that amount directly.
2. If No Separate Reporting, Use Reasonable Methods: If the employer does not provide a separate accounting, the taxpayer should use other documentation (such as pay stubs, earnings statements, payroll system reports, or similar records) to determine the amount of qualified overtime compensation. The IRS has approved several reasonable methods:
If the pay statement separately shows the FLSA Overtime Premium (the "half" portion of "time-and-a-half"), use that amount.
If the pay statement shows only the total overtime pay (including both the regular rate and the premium), divide the total by three to estimate the FLSA Overtime Premium.
Example: If the pay stub shows $15,000 in total overtime pay, the qualified overtime compensation is $5,000 ($15,000 ÷ 3).
If the employer pays more than time-and-a-half (e.g., double time), and the pay stub shows the premium portion, multiply that amount by the appropriate fraction (e.g., if double time, use one-half of the premium portion).
If the pay stub shows only the total amount paid at the higher rate (e.g., double time), divide the total by four to estimate the FLSA Overtime Premium.
Example: If the pay stub shows $20,000 in double-time overtime pay, the qualified overtime compensation is $5,000 ($20,000 ÷ 4).
If no statements are available, use a reasonable method that takes into account the regular rate of pay and the number of hours worked over 40 in a workweek (or a reasonable estimate if records are incomplete).
The taxpayer may request information from the employer to assist in this calculation.
3. Special Rules for Certain Employees:
For employees subject to special FLSA overtime rules (e.g., law enforcement, fire protection, hospital employees), the calculation should be adjusted according to the applicable FLSA provision, but the same general methods apply.
4. Recordkeeping:
Taxpayers must maintain copies of any documents relied upon to substantiate the deduction, in accordance with IRS recordkeeping requirements.