IRS has updated its FAQs on the deduction for qualified overtime compensation, clarifying eligibility, deduction limits, reporting requirements and rules for federal employees. The updated guidance also provides further details on withholding and the treatment of qualified overtime compensation for tax years 2025 and 2026 onwards.
The US Internal Revenue Service (IRS) has updated its frequently asked questions on the deduction for qualified overtime compensation, providing further clarification on eligibility, calculation, reporting and withholding requirements.
The updated guidance issued on 6 August 2026, is contained in Fact Sheet FS-2026-13 and supersedes the earlier FAQs in FS-2026-01 issued in January 2026.
Deduction limits and eligibility
The IRS said qualified overtime compensation is overtime compensation paid to an individual under section 7 of the Fair Labor Standards Act (FLSA) that exceeds the individual’s regular rate of pay.
For example, where an FLSA overtime-eligible employee receives one-and-one-half times their regular rate for overtime, the additional half of the regular rate constitutes qualified overtime compensation.
The deduction is capped at USD 12,500 of qualified overtime compensation per return, or USD 25,000 for a joint return. It is reduced where a taxpayer’s modified adjusted gross income (MAGI) exceeds USD 150,000, or USD 300,000 for joint filers.
Whether an individual is an FLSA overtime-eligible employee depends on factors including their occupation, work activities and earnings. The IRS noted that several exemptions apply to the FLSA overtime premium requirement.
Reporting requirements
The updated FAQs also clarify reporting requirements for qualified overtime compensation.
For tax year 2025, employers and other payers are not required to report qualified overtime compensation separately on Forms W-2, 1099-NEC or 1099-MISC. Employers may nevertheless choose to provide separate reporting, including through box 14 of Form W-2.
For tax years 2026 and later, employers and other payers are required to separately report qualified overtime compensation. The relevant Forms W-2, 1099-NEC and 1099-MISC will be updated to facilitate this reporting.
The updated guidance also adds information on federal income tax withholding procedures and clarifies the requirement for qualified overtime compensation to be separately reported on Form W-2 when claiming the deduction.
Federal employees
The IRS has provided additional guidance for federal employees on determining FLSA overtime eligibility.
For most federal employees, FLSA eligibility is generally recorded on Standard Form 50, Notification of Personnel Action. In block 35, an “E” indicates that an employee is exempt or FLSA-ineligible, while an “N” indicates that the employee is nonexempt or FLSA overtime-eligible.
Special rules may apply to FLSA overtime-eligible federal employees when calculating qualified overtime compensation.
IRS guidance and taxpayer reliance
The IRS said the FAQs provide general information for taxpayers and tax professionals and may be updated or modified following further review.
Because the FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. The law will control a taxpayer’s tax liability if an FAQ is found to be inaccurate as applied to a particular case.
However, taxpayers who reasonably and in good faith rely on the FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, where that reliance results in an underpayment of tax.
The updated FAQs also include an index, revised and renumbered questions, clarification of the limits and timing of the deduction, additional information on FLSA coverage and exemptions, and further guidance on reporting and withholding requirements.
