IRS releases FAQs on qualified overtime pay deduction under H.R. 1

The IRS issued Fact Sheet 2026-01 on Friday to address frequently asked questions (FAQs) about the deduction for qualified overtime compensation in H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act. The FAQs focus on qualified overtime compensation and the Fair Labor Standards Act (FLSA).

Overtime compensation is considered qualified under H.R. 1 when it is required under Section 7 of the FLSA and when it exceeds the regular rate of pay. For example, if an individual is paid at “one and one-half times” their regular rate for an hour of overtime work, as the FLSA requires, the “half” portion of the “one and one-half times” is qualified overtime compensation, the IRS said.

The FAQs explain that, generally, individuals eligible for overtime under the FLSA must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half times their regular rate of pay. If the employer pays more than is required under the FLSA, the qualified overtime compensation is limited to the portion of the overtime that the FLSA requires.

It’s common for employees in the United States to be covered by the FLSA, but many exceptions for the overtime requirement exist, the IRS said. Each situation is fact-specific, based on an individual’s occupation, work activities, and earnings, the FAQs said.

The IRS provided Department of Labor (DOL) links to help employees determine whether the FLSA overtime requirement affects them: Fact Sheet #14: Coverage Under the Fair Labor Standards Act and the exemptions section of the Handy Reference Guide to the Fair Labor Standards Act.

The IRS previously issued Notice 2025-62 providing penalty relief to employers and other payers for tax year 2025 regarding new information-reporting requirements for qualified overtime compensation. It also issued Notice 2025-69 for workers eligible to claim the deduction for overtime compensation for tax year 2025. 

Neither of the previous notices addressed how the qualified overtime compensation provision of the new legislation affects federal employees. The FAQs explain that FLSA eligibility for federal employees is typically documented on the employee’s Standard Form 50, Notification of Personnel Action.

Although the Office of Personnel Management administers the FLSA for most federal employees, exceptions, the FAQs said, include employees of the Library of Congress, the U.S. Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority. Those employees are covered by the DOL’s FLSA regulations and guidance.

The FAQs also explain the differences in reporting requirements for tax year 2025 and tax years 2026 through 2028.

The IRS issued the FAQs “to provide general information to taxpayers and tax professionals as expeditiously as possible,” the IRS said, adding that it would not rely on the FAQs or use them to resolve a case. If an FAQ is determined to be legally inaccurate, then the law will control a taxpayer’s tax liability, the IRS said.

“Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable-cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax,” the IRS said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.