The Internal Revenue Service and the Treasury Department released a set of questions and answers on the new deduction for overtime pay under the One Big Beautiful Bill Act only a few days before the start of tax season.
The FAQs in
The FAQs include more information about the deduction, provide resources for employees (including federal employees) to assist them in determining whether they received qualified overtime compensation under the Fair Labor Standards Act, and contain useful information regarding the differences in reporting requirements for tax year 2025 and 2026-2028.
The IRS and the Treasury have already offered some previous
The questions in the new FAQ page include answers on what is considered to be qualified overtime compensation for purposes of the deduction. The IRS noted that qualified overtime compensation is overtime compensation paid to an individual required under section 7 of the
Another question asks how to determine whether a taxpayer is covered by and not exempt from the FLSA, in other words, how do they determine if they are an FLSA overtime-eligible employee? The FAQ page pointed out that while it is common for employees working in the U.S. to be covered by the FLSA, there are many exemptions from its overtime premium requirement. "Whether an individual is covered by and not exempt under the FLSA is a fact-specific determination that depends on the individual's occupation, work activities, and/or earnings," said the fact sheet.
The FLSA rules figure prominently in discussions of the new overtime deduction. "Those FLSA rules apply, and that's what's going to be applied in determining what the deductions are," Dan Lewis, vice president of government affairs at the payroll giant ADP, recently told Accounting Today. "The challenge is going to be that very few employers pay strictly based on FLSA standards. Employers often provide more generous benefits, whether it's counting PTO toward your 40 hours of work in a week, whether it's saying you're going to get overtime because you work on a holiday, whether it's saying you're going to get overtime at a rate of two times the regular rate of pay. The challenge will be making sure that what the employees are claiming for deductions is what they're qualified to claim under FLSA, which is going to be a dual accounting of here's your aggregate overtime of everything you got and here's your accounting of overtime for purposes of taking your deduction. There's also different rules at the state level. California is a great example of that. In California, the standard for overtime is two times the regular rate of pay, and employees are qualified for overtime if they work more than eight hours a day."
There may be ways to simplify those determinations. "How do I figure out what the overtime is? The easiest takeaway is to look for those hours over 40 as defined under the Fair Labor Standards Act," said Tom O'Saben, director of tax content and government relations at the National Association of Tax Professionals, during a recent Accounting Today webinar. "Don't get so hung up on what a state law might be or what a different company may offer, such as differential pay or maybe triple pay on a Sunday, but what really is determined as overtime from the standpoint of the federal Fair Labor Standards Act?"
The fact sheet released Friday on the overtime deduction provides information to taxpayers and tax professionals after the IRS and the Treasury decided not to update the W-2 and 1099 forms ahead of tax season to reflect the changes in the OBBBA, along with some degree of penalty relief if taxpayers follow the information on the FAQ page.
"FS-2026-01 acts as a vital bridge between the statutory language of the OBBBA and the practical application required for the 2025 tax year," wrote Ed Zollars of Thomas, Zollars & Lynch in his
