IRS Releases FAQs on Qualified Overtime Pay Deduction Under H.R. 1

Why It Matters

The clarification directly impacts payroll processing and tax reporting for millions of workers, reducing compliance uncertainty for employers and federal agencies. It also provides a safe harbor against penalties for taxpayers who follow the IRS’s interim guidance.

Key Takeaways

• Qualified overtime limited to FLSA‑required half‑rate portion
• FAQs cover federal employee eligibility and exceptions
• Reporting rules differ between 2025 and 2026‑2028
• Penalty relief applies for good‑faith reliance on FAQs
• Prior notices 2025‑62/69 do not address federal workers

Pulse Analysis

The passage of H.R. 1 introduced a new tax deduction for qualified overtime compensation, prompting the IRS to issue Fact Sheet 2026‑01 to demystify the rule. By anchoring eligibility to the Fair Labor Standards Act, the agency ensures that only the statutory overtime premium—commonly the one‑and‑a‑half times rate’s extra half—is deductible. This alignment with existing labor standards simplifies the calculation for both employees and payroll systems, while also preserving the integrity of the tax code by preventing over‑deduction of discretionary overtime pay.

Employers, especially those with federal workforces, must now navigate nuanced eligibility criteria. The FAQs detail that most federal employees are covered under the Department of Labor’s FLSA administration, yet agencies like the Library of Congress and the U.S. Postal Service follow separate DOL regulations. Reporting obligations also shift: tax year 2025 follows the initial guidance in Notices 2025‑62 and 2025‑69, whereas years 2026‑2028 adopt updated reporting formats outlined in the new FAQs. Companies should adjust their payroll software and internal controls to capture the precise FLSA‑required overtime component, avoiding mismatches that could trigger audits.

From a compliance perspective, the IRS’s statement that good‑faith reliance on the FAQs shields taxpayers from negligence penalties offers a pragmatic safety net. This reasonable‑cause protection encourages timely adoption of the guidance without fear of retroactive penalties, fostering smoother implementation across industries. As the overtime deduction matures, future guidance may refine exemption thresholds or expand coverage, making ongoing monitoring essential for tax professionals and HR leaders alike.

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

By Martha Waggoner · January 23, 2026

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.