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'No Tax on Overtime' (Guidance and Resources)
(Updated 2/5/2026)
The Internal Revenue Service (IRS) has published guidance for employees to deduct qualified overtime compensation from federally taxable income, also known as “no tax on overtime,” beginning in 2025.
This new, temporary deduction will have significant implications for government finance officers as governmental entities are one of our nation’s largest employers and adhere to a combination of federal, state and local regulations on overtime pay.
Key Highlights
- To access the deduction, employees must be FLSA-covered and non-exempt. The deduction is not available for overtime paid voluntarily or under state law if not required by FLSA.
- Overtime amounts above FLSA requirements (e.g., double time beyond required premium) are not deductible.
- The guidance takes into account FLSA-covered overtime based on work periods rather than a 40-hour work week.
- State and local government employees who were paid compensatory time in 2025 in lieu of cash payments for overtime can incorporate this time into their calculation.
- For 2025, employers are not required to separately report qualified overtime on Form W-2 or 1099, in line with prior IRS guidance. The IRS allows employees to use alternative documentation (pay stubs, payroll statements) to calculate the amount.
- The guidance provides calculation methodology for employees to calculate qualified overtime pay in 2025 if separate accounting of FLSA and non-FLSA overtime is provided.
CLICK HERE TO ACCESS 'NO TAX ON OVERTIME' RESOURCES AND GUIDANCE
AMERICAN RESCUE PLAN RESOURCES (ARPA)
(Updated 2/5/2026)
Important Note to Finance Officers from Entities Which Received ARPA Funds: Reporting to the Federal government on the use of the funds is still required until 2027. Click below for information on ARPA reporting requirements and how to navigate the reporting systems.
CLICK HERE FOR ARPA FUND REPORTING Resources
