IRS Issues Guidance on “No Tax on Overtime” Provision

Written by: Curtis Coonrod

[Revised: 11/25]

The IRS has released Notice 2025-69, providing detailed instructions for implementing the new “No Tax on Overtime” provision introduced under the One Big Beautiful Bill Act (OBBBA) signed into law earlier this year. This measure aims to reduce tax burdens for workers earning extra through overtime and tips.

Key Highlights

• Effective Period: Tax years 2025–2028.
• Deduction Limits:
• Up to $12,500 for qualified overtime pay ($25,000 for joint filers).
• Up to $25,000 for qualified tips.
• Income Phase-Out: Deduction begins to phase out for taxpayers with Modified AGI over $150,000 (single) or $300,000 (joint).

Definition of Overtime

For purposes of this tax exemption, “overtime pay” means the overtime premium required under the Fair Labor Standards Act (FLSA)—the additional one-half of the regular rate paid for hours worked beyond 40 in a workweek. Regular wages, shift differentials, and bonuses do not qualify unless they are part of the FLSA overtime calculation.

Reporting and Compliance

• 2025 Transition Year:
• Forms W-2 and employee tax returns will continue to report total wages as before, but the IRS guidance specifies that the amount of qualified overtime pay will also be reported.
• Employees will claim deductions on Form 1040, Schedule 1-A (Additional Deductions).
• Employers are encouraged—but not required—to provide supplemental statements showing overtime and tips.
• Penalty Relief: Employers have penalty relief for 2025 if they do not separately report qualified overtime and tips. Full compliance will be required starting in 2026.
• Documentation: Employees may use pay stubs, year-end summaries, or reasonable approximations if employers do not provide detailed reporting.

Action Steps

• For Employers:
• Begin preparing payroll systems for 2026 compliance.
• Consider voluntary reporting in 2025 to assist employees.
• For Employees:
• Keep detailed pay records.
• Use Schedule 1-A when filing 2025 taxes.

This provision represents a significant tax benefit for workers who rely on overtime and tips. Employers and employees should familiarize themselves with the IRS guidance to ensure smooth implementation.

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