01/27/2026
Understanding the New Overtime Tax Deduction
The Tax Relief for American Families and Workers Act includes a deduction for qualified overtime compensation. Here's what counts:
⏰ What qualifies: Only the premium portion of overtime pay required under the Fair Labor Standards Act (FLSA). If you're paid time-and-a-half for overtime, the "half" portion is qualified overtime compensation.
✅ Who's eligible: You must be both covered by the FLSA and not exempt from its overtime requirements. If you're exempt from FLSA overtime (such as certain salaried professionals), none of your overtime pay qualifies for this deduction, even if your employer voluntarily pays you overtime.
🧮 How it's calculated: For FLSA-eligible employees, overtime is typically required for hours over 40 per week at 1.5x your regular rate. If your employer pays more than required (such as double-time), only the portion needed to meet FLSA requirements qualifies—not the additional premium your employer voluntarily provides.
💵 Example: If you earn $20/hour regular pay and work 45 hours, you'd receive 5 hours at $30/hour. The qualified overtime compensation is 5 hours × $10 (the premium above your regular rate) = $50.
⚠️ Important note for union employees: If your collective bargaining agreement provides overtime for conditions beyond FLSA requirements, only the FLSA-required portion qualifies. For example, if you work for Michigan's Department of Corrections and receive overtime for working over 8 hours in a day, only overtime hours beyond 40 in the workweek count as qualified overtime compensation—not the daily overtime your union contract provides.
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