Compliance Corner: One Big Beautiful Bill—IRS Update on Qualified Overtime Deductions

With new federal guidance now available, employers and employees alike are beginning to feel the impact of the “One Big Beautiful Bill Act” (OBBBA), also known as H.R.1. The legislation added a new deduction for qualified overtime compensation, which is limited to Fair Labor Standards Act (FLSA)-required overtime or the half portion of time and a half. The change is retroactive to January 1, 2025, and applies to qualified overtime hours worked through December 31, 2028.

This change will impact both individuals as they begin to prepare their tax filings, as well as tax professionals. Many employees may be looking for guidance from their employers.

The Internal Revenue Service (IRS) recently issued a Fact Sheet to help guide taxpayers and tax professionals as they navigate these changes.

Here’s what you need to know:

• An employee must be covered by the Fair Labor Standards Act (FLSA) and not exempt from FLSA overtime to claim the deduction.

• An FLSA overtime-eligible employee must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half times their regular rate of pay. Any additional overtime pay cannot be deducted.

• The Fact Sheet provides guidance to assist federal employees in determining whether they are FLSA overtime-eligible and in calculating federal employee qualified overtime.

• The IRS confirms that for tax year 2025, employers and payors are not required to report qualified overtime compensation on a W-2 or 1099.

• The IRS provided resources to help employees determine their qualified overtime.

• For tax years 2026 and later, employers and other payors are required to separately report qualified overtime compensation. Forms W-2, 1099-NEC, and 1099-MISC will be updated to allow employers and other payors to provide separate reporting of an individual’s qualified overtime compensation.

For more information on qualified overtime deductions, you can read the entire IRS Fact Sheet here.

New legislation continues to add to HR’s workload. If you could use an extra set of HR hands, or expert guidance, isolved HR Services is ready to help your team.

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