The Internal Revenue Service (IRS), in Notice 2025-69, has issued more guidance on the tax deduction for qualified overtime (OT). Even with this Notice, though, official guidance—especially for tax year 2025—is still skimpy. In the meantime, experts offer important clarifications that will be helpful to employers with employees who may qualify for the tax deduction.
In Notice 2025-69, released on November 21, the IRS makes clear that only the extra portion (the “half” of “time-and-a-half”) of qualified OT pay is deductible by recipients. Consequently, experts say, employers should, if they can, provide specific information to their employees who have been paid qualified OT as to how much of that OT pay is actually deductible.
The Notice includes examples based on 2025 compensation which suggest that as a general rule one third of an OT payment (if otherwise qualified) will be deductible. In other words, if an employee is paid $150 in qualified overtime, only $50 of that payment will be deductible.
Per previous guidance, employers can use “any reasonable method” to report 2025 OT pay (including use of Box 14 on Form W-2). And, the IRS has also announced (in Notice 2025-62) that it will not, for 2025, assess penalties against employers who fail to file correct information returns with the IRS or provide correct payee statements to employees.
However, employment law experts are joining with the IRS in encouraging employers to provide accurate OT payment information to their workers. They note that only OT pay that is required under the Fair Labor Standards Act (FLSA) is eligible for the deduction. They point out that state-required OT pay that is not required under the FLSA will not qualify. OT earned by an exempt employee (the FLSA’s white-collar exemption), OT paid as a result of a collective bargaining agreement, or OT paid simply as a matter of an employer’s generosity will likewise not qualify, experts say. Experts also point out that the IRS has said that employees can rely on employer-reported qualified OT amounts, and that the IRS is “encouraging” employers to provide that information to employees, through Box 14 on Form W-2 or in a separate statement.
Prospects: A more robust body of guidance on the OT deduction is expected early in 2026. Many details need clarification—e.g., how to treat OT paid by related but separate employers. The IRS considers this deduction a priority and recognizes that the individuals who qualify for the deduction are less likely than their employers to know and understand the rules of how the deduction works. So, employers are advised to prioritize making sure that their employees have the information they need to take the deduction if they are in fact being paid qualified OT.
The deduction for qualified OT expires at the end of 2028, but as is the case with virtually all extenders, it is likely Congress will be under pressure to extend it. That means the OT issue is likely to remain live for the foreseeable future. Washington insiders anticipate an effort to impose obligations on employers to be sure their employees know about and can claim any OT deduction to which they are entitled.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.