Your crew heard the headline and started asking you about it. The deduction is genuine, the part that qualifies is the premium the Fair Labor Standards Act makes you pay, and it only reaches anybody if the figure comes out of your pay runs in one piece.
Your people are asking whether their overtime is coming back to them, and you are the one who has to answer. The honest answer runs through your payroll file, because the deduction only reaches the premium portion of required overtime and somebody has to be able to pull that figure out of a year of pay runs. If your system posts every overtime hour into one gross number, the figure your crew needs is buried, and whoever types your return in April has no way to reconstruct it. Send last year's return and tell us how payroll is coded, and Steven Palmieri reads both before you talk. Twenty minutes later you know whether your setup can produce a clean qualified overtime figure, what to change before this year closes, and how the provision reads against your own pay if you take overtime yourself. You also hear what the monthly work costs with the tax plan inside it. A tax plan on its own carries a $15,000 price at plenty of firms, and here it arrives with the bookkeeping and the return, because a plan only pays off when somebody keeps acting on it through the year. No charge for the call and nothing to sign at the end of it.
Start with the mechanics, because the headline leaves them out. Qualified overtime compensation is the pay that exceeds the regular rate, required under section 7 of the Fair Labor Standards Act. When an hour of overtime is paid at one and one half times the regular rate, the half is the part that qualifies. The forty hours underneath it never enter the calculation, and neither does overtime an employer pays voluntarily or under a contract the Act does not require. It is claimed on the return, on the new Schedule 1-A, and it is available whether the filer itemizes or takes the standard deduction. Withholding can move during the year as well, because an employee who files a fresh Form W-4 can account for the expected deduction and see part of it in each paycheck instead of waiting for filing season.
There are edges on it. The deduction runs up to $12,500 of qualified overtime for the year, or $25,000 on a joint return, and it is reduced once modified adjusted gross income passes $150,000, or $300,000 for joint filers. It applies for tax years 2025 through 2028. The person claiming it needs a social security number valid for employment, and a married filer has to file jointly to take it at all. Overtime pay itself keeps behaving the way it always has, because social security, Medicare and federal unemployment tax still apply to it.
Source: IRS, Questions and answers about the new deduction for qualified overtime compensation, and IRS Publication 15 (2026), Employer's Tax Guide.
None of that tells you what your own year looks like, or whether the figure your staff will be asking about exists anywhere in your system. Twenty minutes on last year's return and your payroll setup does.
The provision is generous on paper and fragile in practice, because it depends on a figure somebody has to produce. Three ordinary failures account for most of the deductions that never get claimed, and all three happen inside payroll rather than inside the tax return.
A pay run that posts overtime as one gross figure leaves nothing to report. For 2025 employers were not required to break qualified overtime out separately, so plenty of systems were never configured to do it, and that grace does not cover the years from 2026 on. Fixing it after the fact means rebuilding a year of pay runs out of timesheets, if the timesheets kept enough to rebuild from.
Your staff take that form to whoever prepares their return and expect the number to be sitting on it. When it is absent they guess, skip the deduction, or call you in February asking why the shop down the road managed it. The reporting obligation sits with you, and so does every one of those conversations.
Payroll configuration is an autumn job, and somebody who only appears at filing season has no reason to raise it while there is still time to act. By the time the return is being typed, the year that needed tracking has already closed. Twenty minutes now is how you find out which of the three you are heading for.
Nobody controls whether the provision survives past the years it was written for, and nobody controls what the phase-out does to a household above the threshold. What you control is who is looking at your payroll while the year is still open. Somebody who meets you once in April, takes the folder and files from it has never had a reason to ask how your pay codes are built, and will not be the one who warns you in October that this year's qualified overtime has become untraceable. That conversation happens in the autumn or it does not happen at all, and when it does not, the cost lands on every person on your payroll who expected a deduction and will not be able to take one. A crew notices that. You would rather be the shop where it worked.
Take this page to whoever prepares your return and ask two things: whether your qualified overtime was reported anywhere on your wage statement, and how the figure should be worked out if it was not. Your own eligibility turns on your filing status, your income and your employer's reporting, so it belongs in a conversation with your own preparer rather than on a landing page. What is handled here is the business side of it, for owners and for people who run their own shop.
You send last year's return and a plain description of how payroll runs, and Steven Palmieri reads both before the call. He prepares and signs the returns that come out of this practice, and the same people keep the books those returns are built from, so the answer you get about your payroll is coming from the person who would have to live with it. You get back what the return says about how the year was managed, whether your system can produce a clean qualified overtime figure, what to fix before December, and the monthly number with the tax plan inside it rather than quoted separately at $15,000 the way plenty of firms do it. No charge, and nothing to sign.
No. The deduction reaches the pay that exceeds the regular rate, which is the half in time-and-a-half required under the Fair Labor Standards Act, and the hours underneath it are treated the way they always were. Overtime you pay above what the Act requires sits outside it entirely. Somebody still has to pull that premium figure out of your pay runs, which is the part that usually fails. Source: IRS, Questions and answers about the new deduction for qualified overtime compensation.
Social security, Medicare and federal unemployment tax still apply to overtime pay, so the withholding you are used to keeps coming out of it. Federal income tax withholding can move, because an employee who files a fresh Form W-4 can account for the expected deduction and receive more in each paycheck instead of waiting until the return is filed. That is the employee's call, and your job is to honor the form you are handed. Source: IRS Publication 15 (2026), Employer's Tax Guide.
Employers and other payors file information returns and furnish statements showing the qualified overtime compensation paid during the year. For 2025 there was relief, because separate reporting was not required, and some employers used box 14 of the W-2 or a separate statement anyway. For 2026 and later years that separate reporting is required. That puts the configuration work in this calendar year rather than next spring. Source: IRS, Questions and answers about the new deduction for qualified overtime compensation.
It depends on what your timesheets kept and how your pay codes were built, which is exactly what the twenty minutes looks at. Sometimes the premium is recoverable from hours data already sitting in the system. Sometimes the honest answer is that the closed year cannot be rebuilt cleanly and the work is to make the next one right from the first pay run. Nobody can tell you which without opening the file, and you get the straight version either way.
Steven Palmieri reads the return before the call, and he prepares and signs the returns this practice files. The same team keeps the books those returns are built from, so the payroll answer and the tax answer come from one place. We do not represent anyone in an audit or an appeal and we do not take collection cases. This is for an owner with hourly staff, or somebody running their own shop who wants the year planned rather than described after it has ended.