Do exempt workers who get straight pay overtime over 40 hours qualify for the no tax on overtime
Executive summary
The new “No Tax on Overtime” provisions let employees deduct the FLSA overtime premium—the “half” portion of time‑and‑a‑half—for tax years 2025–2028, but only for overtime that qualifies under the Fair Labor Standards Act (FLSA) and for workers who are non‑exempt under FLSA (i.e., covered by overtime rules) [1][2]. Multiple payroll and legal guides emphasize that straight‑paying salaried employees who are exempt from FLSA generally do not qualify simply because their employer pays “straight time” for hours over 40 [3][4].
1. Who the law explicitly targets: FLSA non‑exempt workers
Congress and the Treasury/IRS described the deduction as applying to “qualified overtime compensation” that exceeds a worker’s regular rate of pay as required by the FLSA; Treasury/IRS guidance and multiple practitioner writeups state the deduction is available to employees who are covered (non‑exempt) under the FLSA—not to exempt salaried employees—so FLSA status is the primary gatekeeper [1][2][3].
2. What is deductible: the overtime premium, not the straight‑time
The statutory and IRS descriptions make clear the deductible amount is the premium over regular pay—typically the “half” in time‑and‑a‑half—not the full overtime dollar amount. Guidance and news summaries use the example: if regular pay is $20 and overtime pay is $30, only the $10 premium is the qualified amount for the deduction [1][5].
3. Straight pay for over‑40 hours: why that matters
Several employer advisories and union FAQs flag a common practice: employers sometimes pay “straight time” or voluntarily pay extra to salaried/exempt staff for extra hours. The new law ties the deduction to overtime required by FLSA; overtime that is voluntarily paid, or that arises from state rules, collective bargaining, or internal policy rather than FLSA, is not plainly covered by current statutory language and is treated skeptically in practitioner guidance [4][6]. Where employers pay salaried exempt workers extra straight wages for longer weeks, available sources say that extra pay generally does not qualify because the workers are exempt and the pay is not FLSA‑required overtime [3][7].
4. Areas where the law and guidance leave questions
Treasury/IRS notices and employer analyses admit unresolved implementation work: payroll systems must separately identify qualified overtime on W‑2s and pay stubs, IRS issued transition relief for 2025, and more specific regulatory rules (e.g., treatment of overtime required by state law or CBAs, calculations of the “regular rate”) are still being clarified by forthcoming guidance [1][8][3]. Several sources explicitly state further IRS guidance and regulations are expected to resolve edge cases [9][3].
5. Practical consequence for an exempt salaried worker paid straight time
If you are classified as FLSA‑exempt but your employer pays extra straight‑time or a time‑and‑a‑half‑equivalent voluntarily for hours beyond 40, current reporting and guidance indicate you will likely not be eligible for the overtime deduction because the payment is not FLSA‑required overtime for non‑exempt workers [3][4]. Multiple employer advisories and legal analyses recommend employers and employees not assume eligibility for exempt employees until IRS rules say otherwise [7][4].
6. Limits, caps and reporting mechanics to keep in mind
Even qualifying overtime premiums are subject to dollar limits and phaseouts: the deduction caps at $12,500 per individual ($25,000 joint) and phases out for taxpayers with MAGI over $150,000 ($300,000 joint), and qualified amounts must be reported on W‑2/1099 or other statements per IRS rules and transition guidance [10][8][11].
7. What employers and payroll teams must do now
Practitioners urge employers to update payroll coding and W‑2 reporting to separately identify FLSA‑qualified overtime, to document how “regular rate” is calculated, and to avoid treating exempt employees’ voluntary extra pay as qualified overtime without legal review; the IRS allowed transition methods for 2025 but signaled formal reporting boxes and rules will evolve [2][3][12].
Limitations and open questions: sources do not provide an exhaustive list of every exception or a final regulatory text resolving state‑law overtime, collective bargaining, or voluntary straight‑time situations; Treasury/IRS guidance continues to be the authoritative interpreter and is still evolving [8][9]. Available sources do not mention any explicit provision that automatically makes straight‑paid overtime for an exempt employee qualifying overtime—indeed, current reporting treats that scenario as ineligible unless it meets FLSA non‑exempt criteria [4][3].