IRS Clarifies Rules for New Overtime Tax Deduction

The IRS released updated guidance on the new overtime tax deduction in September 2026, replacing temporary rules issued earlier in the year and clarifying exactly what workers can claim.

The deduction applies only to the premium portion of overtime pay, not the full overtime wage. For a worker earning $20 per hour who receives $30 per hour for overtime, only the extra $10 per hour qualifies for the deduction. The base wage portion does not count.

The IRS also clarified that if state law or a union contract requires overtime pay calculated differently from the federal Fair Labor Standards Act standard, only the portion required by federal law is eligible.

Starting with the current tax year, employers must report qualified overtime pay separately on workers' W-2 and 1099 forms. The IRS said this requirement will make it easier for employees to claim the deduction without having to calculate the eligible amount themselves.

The deduction is worth up to $12,500 for single taxpayers and up to $25,000 for married couples filing jointly. It begins phasing out for single filers with modified adjusted gross income above $150,000 and for joint filers above $300,000.

Workers who regularly put in overtime hours should review the updated guidance to understand how much of their overtime pay actually qualifies. Tax experts say the premium-only rule means many workers will receive a smaller deduction than they initially expected.