How do employers calculate "qualified overtime" under OBBBA and where has the IRS defined the formula?
Executive summary
The One, Big, Beautiful Bill Act (OBBBA) lets workers deduct “qualified overtime compensation,” defined largely as the FLSA-required overtime premium — the portion of overtime pay that exceeds an employee’s regular rate (for many employees, the “half” in time‑and‑a‑half) — and the IRS has set out interim calculation and reporting guidance in Notices 2025‑62 and 2025‑69 and related newsroom material [1] [2] [3]. Employers calculate that premium by identifying FLSA‑eligible overtime hours, determining the regular rate (including nondiscretionary pay when applicable), and computing the overtime premium (generally 0.5 × regular rate per overtime hour), although the IRS allows “reasonable methods” for 2025 while forms and systems are updated [4] [5] [6] [7].
1. What “qualified overtime” means in law and IRS guidance
Congress added the overtime deduction through OBBBA and defined the statutory concept in new Internal Revenue Code language codified as the qualified overtime provision; Treasury and the IRS explained that “qualified overtime compensation” is the overtime pay required by section 7 of the Fair Labor Standards Act (FLSA) that exceeds the regular rate of pay — in practical terms the overtime premium portion of FLSA pay (for example, the half‑time premium of time‑and‑a‑half) [7] [6] [1].
2. The practical formula employers use to compute qualified overtime
In routine cases employers identify weekly hours over 40, compute the regular hourly rate (which must include certain nondiscretionary pay when applicable), calculate the overtime rate at 1.5× the regular rate, then treat the excess above the regular rate (generally 0.5× regular rate per overtime hour) as the qualified overtime amount — for example, an employee with a $20/hr regular rate who works overtime has an overtime rate of $30 and a qualified overtime premium of $10 per overtime hour [4] [5] [1].
3. Complications: bonuses, double time, and the “reasonable method” safety valve
When nondiscretionary bonuses or other pay change the regular rate, the overtime premium calculation must be adjusted to reflect the new regular rate (the IRS and practitioners show examples where including an $800 bonus raises the regular rate and thus changes the half‑time premium) [4]; if an employer pays double time or other non‑FLSA‑required rates, only the portion that corresponds to the FLSA‑required premium generally qualifies (for instance, if paid double time, only the statutory half portion counts) [5]. Because W‑2 and 1099 forms lacked separate boxes for 2025, the IRS explicitly permits employers and employees to use “reasonable methods” and alternative documentation to determine qualified overtime for tax year 2025 while systems are updated [7] [6] [8].
4. Where the IRS has placed the formula and reporting instructions
The Treasury and IRS published Notice 2025‑69 explaining methods individual taxpayers and payroll preparers may use to determine deductible qualified overtime when separate employer accounting is unavailable, and Notice 2025‑62 provided transition relief from penalties for 2025 reporting deficiencies while forms are revised; the IRS newsroom, the One Big Beautiful Bill provisions page, and the November 21, 2025 guidance collectively set the operational expectations and examples employers should follow [3] [7] [9] [2]. The IRS also indicated that formal employer reporting will be phased into updated information returns beginning in 2026, and many public employers are recommending use of Box 14 or employer statements and reasonable methods for 2025 [10] [11] [3].
5. What employers and payroll vendors are doing — and the practical tradeoffs
Payroll vendors and employers are implementing calculation engines and interim heuristics — some providers advise calculating the statutory half‑time premium directly while a few guidance pieces and practitioner writeups note simpler approximations (for example, a high‑level heuristic of roughly one‑third of total overtime pay in certain arrangements) — but the IRS’s “reasonable method” language means employers must document their approach, because 2026 forms will require separate reporting and 2025 relief is temporary [12] [5] [7]. Stakeholders pushing faster system changes have an implicit agenda to limit future audit risk, while some smaller employers may favor simple estimates to meet the temporary relief conditions; the IRS guidance (Notices 2025‑62 and 2025‑69) is the authoritative place the agency has defined acceptable calculation approaches for now [7] [3].