IRS Clarifies “No Tax on Overtime” Rule:
What WPPA Members Need to Know
Because there has been widespread confusion about the so-called “No Tax on Overtime” rule, the WPPA wants to ensure our members have accurate, verified information from the IRS. The bottom line is this:
Only a portion of overtime – typically around one-third of an employee’s total overtime earnings – will qualify for the new deduction, because only the FLSA-required overtime premium is eligible.
Below is a clear summary of what the IRS has now confirmed in Notice 2025-69.
What Counts as “Qualified Overtime Compensation”?
The IRS makes clear that:
- Only the FLSA overtime premium—the “half” in “time-and-a-half”—is deductible.
- Regular pay, contractual overtime rates above FLSA minimums, and other wage components do not qualify.
This directly contradicts claims circulating online that all overtime will be tax-free.
Does Your Work Schedule Affect Eligibility?
No. The IRS dispels the misconception that overtime worked under schedules common in law enforcement somehow disqualifies the deduction.
- If the employer’s work period complies with FLSA §207(k), the FLSA overtime premium does qualify.
This applies regardless of whether an officer’s CBA uses a period other than a standard 40-hour week.
How Will This Work for 2025?
For tax year 2025:
- Employers are not required to separately track or report the qualifying overtime premium.
- Officers will determine their deductible amount using their final 2025 paystub.
- Tax software (TurboTax, TaxAct, etc.) has been updated to guide taxpayers through calculating their qualified overtime compensation.
IRS Examples for 2025
- Example 3 (p. 27):
An employee is paid $20,000 in double-time overtime, with the paystub listing $10,000 as “overtime premium.”- Qualified amount: $5,000 (the premium divided by 2).
- Example 4 (p. 28):
Same facts, but the paystub shows a single “overtime” total of $20,000.- Qualified amount: $5,000 (FLSA overtime premium = $20,000 ÷ 4).
- Example 5 (p. 28):
A law enforcement employee working a 14-day §207(k) schedule earns $15,000 in total overtime.- Qualified amount: $5,000 ($15,000 ÷ 3).
Questions About Your Specific Situation?
This summary is intended to help officers understand the IRS guidance. Because every individual’s tax circumstances can differ, members should consult a tax professional for personal tax advice.
The WPPA will continue to monitor developments and provide accurate, timely updates to ensure our members stay informed.