Recent IRS Guidance On OBBBA's Overtime Tax Deduction

Guidance Confirms Employee Communication Is Key

On November 21, 2025, the IRS issued additional guidance for individual taxpayers who are eligible for the One Big Beautiful Bill Act's federal income tax deduction on qualified overtime compensation ("Guidance"). Because the IRS previously indicated that it would not enforce employer reporting obligations for tax year 2025, the Guidance focuses on how individual taxpayers can claim the deduction without additional employer documentation, using several example calculations.

The new Guidance is in line with our prior blog post, The One Big Beautiful Bill's Overtime Tax Deduction.

For employers, three key themes stand out:

1. Deduction Covers Only the "One-Half" Portion of FLSA-required Overtime
As expected, the Guidance confirms that only overtime specifically required by the Fair Labor Standards Act (FLSA) is eligible for the OBBBA overtime tax deduction. In particular:

• Exempt employees who are paid "overtime" are ineligible for the tax deduction.
• Overtime paid pursuant to a collective bargaining agreement, company policy, or state law (rather than the FLSA) does not count toward the deduction.
• Any overtime payment in excess of time-and-one-half is also ineligible.

2. Employees Are Encouraged to Seek Employer Assistance
Although the IRS will not enforce the employer reporting requirements for tax year 2025, the Guidance expressly encourages employees to contact their employers for information needed to claim the deduction, which may include:

• The employee's FLSA exemption status.
• Any amounts paid to the employee that the employer credited against overtime exposure using 29 USC Sec. 207(h).
• Any overtime hours worked.

Employers may want to get ahead of such inquiries, which could overwhelm supervisory, payroll, and human resources personnel in early 2026. Proactive planning—and clear internal processes for responding—may help minimize disruption.

3. Employees May Perceive Employers As A Barrier to Claiming the Deduction
To help bridge the gap created by the suspension of employer reporting for 2025, the Guidance sets forth several IRS-approved calculation methods that employees can use to claim the overtime tax deduction using existing required wage reporting from pay stubs. These methods are designed to approximate the "one-half" portion of FLSA-required overtime pay that qualifies for the deduction.

These approximations may differ from more exacting payroll-based calculations and place an additional burden on employees to locate information and perform the math themselves. If employers do not offer some level of assistance or communication, employees may perceive their organization as unhelpful—or even responsible—for any difficulty in obtaining the deduction. Accordingly, employers should carefully consider the employee-relations implications of a "hands-off" approach.

Next Steps for Employers

Despite the IRS's effort to provide employee clarification with the Guidance, tax year 2025 invariably presents unique challenges for employees seeking to claim the OBBBA overtime tax deduction —and for their employers who may field questions and requests for support.

Employers may wish to get ahead of such challenges early by:

• Communicating proactively with employees about the deduction and what information the company can (and cannot) provide.
• Preparing internal guidance for HR, payroll, and managers on how to respond to inquiries.
• Reviewing overtime practices and recordkeeping to ensure accuracy and consistency.

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