- within Technology topic(s)
On January 23, 2026, the Department of Treasury and the Internal Revenue Service (IRS) issued Fact Sheet 2026-01, providing answers to frequently asked questions (FAQs) about the new "Deduction for Qualified Overtime Compensation" created by the One Big Beautiful Bill Act (the OBBBA).
The OBBBA created the Deduction for Qualified Overtime Compensation to allow individuals to claim a federal income tax deduction for certain qualified overtime compensation for the 2025 to 2028 tax years. Individuals can claim a deduction of up to $12,500 ($25,000 for joint filers) and the deduction phases out for individuals with incomes above $150,000 ($300,000 for joint filers). Employers are required to report to employees the amount of qualified overtime compensation that is paid each year to allow the employees to claim the deduction.
The IRS published initial guidance on November 5, 2025 providing penalty relief to employers and other payors who are unable to comply with the reporting requirements for 2025, but there are still several open questions regarding eligibility for the deduction and reporting compliance.
Fact Sheet 2026-01 addresses questions related to (1) what constitutes qualified overtime compensation, (2) who is eligible for the deduction, and (3) other rules relevant for eligibility for the deduction.
Specifically, the FAQs reiterate that qualified overtime compensation includes only overtime that is required to be paid by Section 7 of the Fair Labor Standards Act (FLSA). For overtime to be required under the FLSA, it must, among other requirements, be paid to an individual who is both covered by the FLSA and not exempt from the FLSA's overtime requirement. If an employer pays overtime that is required by another law or agreement (including a collective bargaining agreement) but that would not be required by the FLSA, the amount is not included in qualified overtime compensation.
The FAQs also make clear that, when an employee is paid "one and one-half times" overtime compensation paid to an employee as required by the FLSA, only the "half" portion of the pay is considered qualified overtime compensation.
Finally, the FAQs also provides resources and guidance that are intended to help assist individuals in determining whether they are FLSA overtime-eligible employees and received qualified overtime compensation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
