A worker who logs a 50-hour week and collects double time for the ten hours past 40 might assume the entire overtime check counts toward the new federal deduction. It does not. In an August 6 rewrite of its guidance on the deduction for qualified overtime compensation, the IRS worked through that exact scenario and confirmed that only a narrow premium slice above a worker’s regular pay rate — not the fuller time-and-a-half, or higher, amount many employers actually pay — is what the write-off created by the One Big Beautiful Bill Act actually covers. The distinction determines whether a household sees a few hundred dollars of taxable overtime turn into a deduction worth a fraction of that, or mistakenly claims an amount the IRS will not allow.
The Arithmetic the IRS Uses to Split the Overtime Check
Fact Sheet FS-2026-13 walks through a specific scenario to show how the split works. A nonexempt employee earning $20 an hour works 50 hours in a single workweek, 10 hours past the 40-hour threshold that triggers overtime under the Fair Labor Standards Act. In the example, the employer chooses to pay double time for those ten hours — $40 an hour — rather than the legal minimum, for a total of $400 in overtime pay. That $400 breaks down into $200 in straight-time wages for the ten hours worked plus a separate $200 premium layered on top of the employee’s regular rate.
The Fair Labor Standards Act itself requires only one and one-half times the regular rate, or $30 an hour in this case, which comes out to a $100 premium layered onto the same $200 in straight-time pay — $300 total for the ten hours, not $400. According to Fact Sheet FS-2026-13, the deduction reaches only that $100 premium, the amount the FLSA actually compels the employer to pay above the regular rate. The additional $100 the employer paid voluntarily, by choosing a double-time policy instead of the legal minimum, generates no deduction at all.
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Voluntary Overtime Above the Federal Floor Doesn’t Count
The same ceiling applies whenever overtime pay comes from something other than the FLSA itself. Some employers offer overtime beyond the federal minimum on their own initiative, under a state overtime law, or through a union contract — paying time and a half after eight hours in a single day rather than only after 40 in a week, for instance, or adding a weekend or holiday premium the FLSA does not require. Fact Sheet FS-2026-13 states that in each of those cases, an employer must still work out what the Fair Labor Standards Act itself would have required, and only that narrower amount is qualified overtime compensation — whatever a state law or a labor contract adds on top earns no deduction.
Coverage cuts the other way too. Employees exempt from the FLSA’s overtime requirement — many salaried executive, administrative and professional employees, outside salespeople, and certain commissioned retail workers among them — generate no qualified overtime compensation no matter what a paycheck or a labor contract calls the extra pay. The Department of Labor’s guidance on FLSA coverage sets out which jobs and businesses the law reaches in the first place, and a worker outside that coverage is outside the deduction as well, regardless of how many hours were actually worked.
Public-Safety and Comp-Time Workers Follow a Different Formula
Not every FLSA-covered worker is paid in cash the moment overtime happens, and the fact sheet addresses that wrinkle directly. State and local government employees who take compensatory time off instead of an overtime check under section 207(o) of the FLSA generate no qualified overtime compensation while the hours sit on the books. The deduction only becomes available once that time is paid out — used as a day off with pay or cashed out when employment ends — and even then, only the portion tied to the underlying half-time premium rate counts toward it.
A related carve-out covers firefighters, police officers and hospital employees whose overtime is calculated under alternative FLSA formulas rather than a standard 40-hour workweek. Federal firefighters in job series GS-0081, for example, work under a 14-day, 106-hour overtime threshold rather than the 40-hour weekly one, and public-sector fire and law-enforcement employees generally fall under a similar extended-period formula built into the FLSA itself. For those employees, the fact sheet ties the deduction to the overtime premium actually paid under whichever alternative formula applies to the job, rather than to a hypothetical recalculation against a standard 40-hour week that was never the basis for the pay in the first place.
Two Income Limits Decide Who Gets the Full Deduction
Even a worker whose overtime is entirely FLSA-required premium pay can still run into a dollar ceiling. The deduction tops out at $12,500 of qualified overtime compensation on an individual return and $25,000 on a joint return, and it phases down once a filer’s modified adjusted gross income passes $150,000 — $300,000 for joint filers. Those thresholds, detailed in the instructions for Schedule 1-A of Form 1040, apply on top of the premium-only rule, so a well-paid nonexempt employee can lose part of the deduction to income even after correctly isolating which slice of overtime pay qualifies in the first place.
Fact Sheet FS-2026-13 applies both limits without exception to the arithmetic in its own example: the $100 of qualified overtime pay from the ten-hour scenario is measured against the same $12,500 ceiling as any other dollar of qualified overtime earned that year, and the same income phase-out applies whether the overtime came from a private employer, a state agency, or a union contract. The fact sheet’s own math, run to its logical end, is the clearest evidence of how narrow the new deduction actually is.
When a Schedule 1-A Miscalculation Slows a Refund
A return that miscalculates the premium-only overtime deduction is exactly the kind of Schedule 1-A entry the IRS flags for review, and a flagged return often means the refund behind it falls behind schedule. When that happens, the notice that eventually arrives explaining the hold is rarely written in plain language, and the standard next step — filing a trace — has paperwork most filers have never seen.
The IRS Refund Recovery Kit works through a notice decoder and the refund-trace steps built around Form 3911, along with a refund status tracker spreadsheet and the three-year deadline for claiming a refund at all.
See the notice decoder and the trace steps in The IRS Refund Recovery Kit.
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