Qualified Overtime Compensation

Qualified Overtime Compensation refers to the 'premium' portion (the extra half in time-and-a-half pay) of overtime wages earned by W-2 employees under the Fair Labor Standards Act (FLSA). The One Big Beautiful Bill Act (OBBBA) introduces a temporary federal deduction for this premium pay, capping the deduction at $12,500 for single/Head of Household filers and $25,000 for married couples filing jointly.

Like other OBBBA provisions, this above-the-line deduction is phase-out restricted. For single filers, the deduction phases out between $150,000 and $275,000 MAGI. For married filing jointly, it phases out between $300,000 and $550,000 MAGI. The deduction only applies to W-2 employees working more than 40 hours per workweek, and does not apply to independent contractors.

Real-World Example Mark, a warehouse worker earning $25/hour, works 50 hours per week for 48 weeks in 2026. His regular pay (40 hours × $25 × 48 weeks) is $48,000. His overtime premium (10 hours × $12.50 half-time rate × 48 weeks) is $6,000. His total W-2 gross is $66,000 ($48,000 regular + $18,000 overtime including premium). Mark deducts the full $6,000 overtime premium under OBBBA, reducing his AGI to $60,000. In the 22% tax bracket, this saves him $1,320 in federal income tax ($6,000 × 22%).