What specific calculation methods does IRS Notice 2025‑69 provide for converting total overtime pay into the deductible overtime premium?

1. How the Notice defines the deductible overtime premium

The IRS frames “qualified overtime compensation” as the portion of overtime pay that exceeds the worker’s regular rate required by the FLSA — in most ordinary arrangements this is the one‑half premium embedded in time‑and‑a‑half pay — and that premium is the portion eligible for the deduction under the 2025 law ^{[1] [3]}.

2. Direct extraction when the pay stub shows the premium separately

If an employee’s earnings statement explicitly labels the overtime “premium” or “overtime premium,” Notice 2025‑69 permits using that stated premium amount as the deductible figure; practitioners and guidance materials reiterate that when the premium is separately identified, taxpayers may simply use that number ^{[4] [2]}.

3. Converting common employer overtime structures into the premium: examples and simple math

Notice 2025‑69 supplies examples for common payroll practices: where an employer pays overtime at two times the regular rate (double time) and the pay stub shows the total premium amount rather than the full overtime sum, the guidance tells taxpayers to multiply that displayed premium by one‑half to reach the deductible half‑rate; when the pay stub shows total overtime compensation (all overtime dollars paid), taxpayers can derive the deductible premium by dividing that total by four in the double‑time scenario — guidance sources summarize these conversions and the Notice’s examples explain the arithmetic ^{[4] [2]}.

4. Reasonable methods B and D — the formal fallbacks when employers don’t separate amounts

The Notice explicitly endorses a set of “reasonable methods” taxpayers may use when employers do not provide separate overtime accounting; commentators flag Methods B and D (illustrated on pages 22–23 of the Notice) as typical fallbacks that convert total overtime to the premium and are acceptable for substantiation in 2025 ^{[3] [2]}.

5. Using hours and the regular rate as an alternate approach

Where pay stubs lack useful labels, the IRS allows taxpayers to reconstruct the premium from documented hours and the regular rate: calculating the average hourly rate, identifying hours beyond the FLSA threshold (typically over 40 in a workweek), and applying the statutory overtime multiplier produces the premium component — a method counsel and firms recommend when year‑end summaries are unavailable ^{[5] [2]}.

6. Special‑rules and occupational exceptions that change the math

Notice 2025‑69 includes detailed examples for alternate FLSA pay structures — such as law enforcement, firefighters, and health‑care workers under alternative work period rules — where the conversion to a “half‑rate” premium requires the specific FLSA formula for that occupation and may not follow the simple divide‑by‑four or half‑multiply shortcuts ^{[2] [4]}.

7. Practical takeaway and limits of the guidance

Practitioners are urged to retain pay stubs, year‑end earnings statements, and logs because the IRS accepts multiple reasonable approaches for 2025 but will expect documentation; the Notice provides clear arithmetic routes (separate premium, total overtime conversion rules, and hours‑based reconstructions) but does not impose a single mandatory formula, leaving room for reasonable reconstruction methods and necessitating good recordkeeping ^{[6] [7] [1]}. Where the sources do not specify one unique conversion for every uncommon pay arrangement, the Notice instead supplies example methods and permits analogous reasonable methods — a flexibility meant as transition relief that will give way to formal reporting beginning 2026 ^{[1] [8]}.