Qualified Overtime Deduction: What CPAs Need to Know | HelloBooks Only the premium part of overtime is deductible. The cap, the phase-out, the joint-filing rule and the records to ask hourly clients for.
Hourly clients will ask whether their overtime is now tax-free. Only the extra half in time-and-a-half is deductible, and the first season depends on records that employers were not yet required to produce.
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Maximum deduction
$12,500 ($25,000 joint)
Applies: 2025 to 2028From IRS.gov · checked October 10, 2026
The deduction covers the premium part of qualified overtime pay, up to $12,500 ($25,000 joint), phasing out over $150,000 ($300,000 joint) of modified AGI. For an hour paid at time-and-a-half, only the extra half of the regular rate counts, not the whole hour’s pay.
Like the other Schedule 1-A items, it needs an SSN and a joint return for married clients, and it is available whether the client itemizes or not.
Employers did not have to show qualified overtime separately on 2025 W-2s, and the IRS waived penalties for leaving it off. For those returns you will be working from pay stubs or an employer letter that splits regular pay from the premium.
Build that request into your organizer now rather than chasing it in April. The IRS published FAQs on the overtime deduction in January 2026 and updated them in August 2026, so check the current version before you settle a borderline case.
For 2026 the penalty relief is gone, so payroll for your business clients needs to track the overtime premium separately from regular wages. Raise it at the year-end planning meeting, before the first 2026 W-2 run, not after.
The plain-English summary for business owners
Schedule 1-A · qualified tips
Payroll and information returns · 2026
New form · tax year 2025 onward
General information for tax professionals, not advice on a specific return. Figures are from IRS.gov on the date shown; check the current IRS instructions before filing.
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