On November 21, 2025, the IRS issued Notice 2025-69 providing guidance to individuals on how they may calculate the amount of their qualified overtime deduction for purposes of claiming the deduction on the 2025 individual income tax return. While the notice seeks to provide guidance to individuals, it also provides valuable guidance to employers in terms of what specifically is included in “qualified overtime compensation” as well as the overtime compensation information that will be most helpful for the employer to provide to the employee for purposes of claiming the deduction for 2025.
Only overtime compensation calculated under section 7 of the FLSA is “qualified overtime compensation”
Notice 2025-69 clarifies that “qualified overtime compensation” is limited to FLSA-required overtime, which for most employment is the .5 premium of 1.5 times the regular rate of pay (as defined in the FLSA) for hours worked over 40 in a workweek and does not include overtime compensation paid that is more than this amount, even if such overtime compensation is required under state law. For purposes of the qualified overtime deduction, the IRS makes clear that overtime compensation paid in accordance with state law, under a collective bargaining agreement with a labor union, or some other methodology utilized by an employer is only considered qualified overtime compensation up to the FLSA-required premium. Amounts paid in excess of the FLSA-required premium do not qualify for the deduction.
Information to provide employees to communicate overtime compensation paid in 2025
In light of this guidance, to the extent the employer calculates overtime premiums for its employees in a different manner than the FLSA-required .5 premium for over 40 hours in the workweek (e.g., double time) and the employees’ pay/earnings statements include such excess amounts, the employer may want to consider separately calculating the amount of 2025 qualified overtime compensation for purposes of inclusion in 2025 information reporting or a separate statement to employees. Providing employees with the FLSA-required overtime premium amount (the “.5” overtime premium) in excess of 40 work hours per week will help facilitate compliance in the employees’ individual claims for deduction of qualified overtime compensation, ease the burden on the employee to calculate the correct amount of qualified overtime compensation paid to them in 2025, and limit the number of questions the employer receives from employees.
Example of instructions to individuals on calculating 2025 qualified overtime compensation:
The IRS guidance provides several scenarios that are meant to assist individuals/employees with determining the amount of their qualified overtime deduction for purposes of their individual income tax return, depending on the type of information provided by their employer (if any) or the information included on the employee’s pay stubs or earning records.
Double time example from IRS guidance:
Individual B’s employer has a practice of paying overtime at a rate of two times an employee’s regular rate of pay and Individual B was paid $20,000 in overtime pay under that practice, although 29 USC § 207 only requires individual B’s employer to pay at one and one-half times the employee’s regular rate. Individual B’s last pay stub for 2025 shows “overtime premium” of $10,000 paid in 2025 (which is Individual B’s overtime premium paid at a rate of two times the individual’s regular rate). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual B may include $5,000 ($10,000 divided by 2). Please note, the amount the individual will be eligible to take as a qualified overtime deduction on their individual income tax return will be based on various factors, such as adjusted gross income and filing status.
In this example the 2025 information reporting or separate statement that would be most helpful to provide the employee would be a statement that calculates the qualified overtime compensation (.5 premium) for them, (e.g., $5,000) with an explanation as to what this number represents.
For employers that calculate overtime compensation differently from 29 USC § 207 such as in accordance with state law and/or under a collective bargaining agreement with a labor union, it becomes more complicated for employees to determine the qualified overtime compensation.
Daily overtime example (for illustration purposes only):
Individual B’s employer pays the individual at a rate of two times the employee’s regular pay for hours worked over 8 hours in one day, in accordance with State C’s law, although 29 USC § 207 only requires individual B’s employer to pay at one and one-half times the employee’s regular rate for hours over 40 hours in a workweek. Individual B’s last pay stub for 2025 shows overtime hours of 500 and “overtime premium” of $10,000 paid in 2025 which does not accurately reflect the qualified overtime compensation for purposes of the deduction.
In this example the 2025 information reporting or separate statement that would be most helpful to provide the employee would be a recalculation of the qualified overtime compensation based on the weekly hours over 40 at the .5 premium with an explanation as to what this number represents.
Note, the maximum allowable deduction is $12,500 for single filers and $25,000 for joint filers, with these amounts reduced or phased out based on adjusted gross income. Individuals that file “married filing separately” are not eligible for the qualified overtime compensation deduction.
Vialto can support you in drafting communications and statements for your employees regarding overtime compensation paid in 2025, calculating the amount of qualified overtime compensation paid, answering questions from employees about the overtime compensation deduction, and identifying ways to streamline your current overtime compensation.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
Tina Schrob
Partner
Julie Baron
Partner
Priya Schwartzburt
Director
Simply follow our Vialto Alerts page on LinkedIn and posts will be displayed on your feed. To ensure you don’t miss one, once you’re on our LinkedIn page, click on the bell icon under the banner image to manage your notifications.
Further information on Vialto Partners can be found here: www.vialtopartners.com
Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.
© 2025 Vialto Partners. All rights reserved.