Overtime Premium Deduction (2025–2028): Compliance Planning for Hourly and Blue-Collar Workers

Author: Gloria Liu, CPA ｜ YCL Tax, Accounting & Advisory

Bottom line in one breath

If you are a Fair Labor Standards Act (FLSA) nonexempt hourly or blue-collar worker in Cary / RTP and earned overtime in 2025–2028, OBBBA (P.L. 119-21) added IRC §225: a federal income-tax deduction for the premium portion of FLSA-required overtime (the “half” in time-and-a-half), generally capped at $12,500 per return ($25,000 married filing jointly), with MAGI phase-out. You do not deduct the entire overtime check. North Carolina’s NCDOR states this deduction does not reduce NC taxable income. Plan from paystubs and Schedule 1-A—compliance planning, not slogans.

Background

FLSA generally requires covered nonexempt employees to receive at least one-and-one-half times the regular rate for hours over 40 in a workweek. Historically the full overtime amount was federally taxable. OBBBA §70202 created §225 for tax years 2025–2028. IRS FS-2025-03 summarizes the benefit; Notice 2025-69 and IRS overtime FAQs explain how to isolate the qualified premium when 2025 Forms W-2/1099 are not yet redesigned. North Carolina updated IRC conformity via Session Law 2026-31, but NCDOR FAQ Q14 still says OBBBA overtime (and related) deductions taken after AGI do not affect NC taxable income.

Old vs. new

1. What is deductible: Old—no special OT premium deduction. New—only the FLSA-required amount above the regular rate, not total OT pay.

2. Caps: $12,500 per return; $25,000 MFJ.

3. Phase-out: MAGI over $150,000 ($300,000 joint): $100 reduction per $1,000 over.

4. Eligibility: Must be FLSA overtime-eligible (covered and nonexempt). Extra OT paid only under state law, a CBA, or company policy—beyond what FLSA requires—generally does not expand the qualified amount.

5. Double-time: If the employer pays 2×, usually only the half-time premium needed for FLSA counts (IRS examples).

6. Claiming: Itemizers and non-itemizers; Schedule 1-A → Form 1040 line 13b (does not cut AGI). Joint return if married; valid employment SSN.

7. Reporting: 2025 transition—no mandatory separate W-2/1099 OT premium box; use Notice 2025-69 methods. 2026+—separate reporting generally required (exact boxes 待核 each year).

8. North Carolina: Federal OT premium deduction cannot reduce NC taxable income (NCDOR Q14).

Self-check

1. You regularly work FLSA overtime in manufacturing, warehouse, retail, logistics, construction, or similar nonexempt roles in 2025–2028.

2. Paystubs show OT premium separately—or only total OT that must be split using IRS methods.

3. You may be exempt (executive/admin/professional/outside sales, etc.) or paid a non-FLSA “overtime stipend”—possibly no qualified premium.

4. MAGI may hit phase-out.

5. You file in North Carolina and need federal vs. state clarity.

Simplified example (illustration only)

Wake County warehouse employee, single, 2025 paystubs show $15,000 of time-and-a-half overtime dollars (regular-rate equivalent + premium), MAGI below phase-out, FLSA-qualified:

1. Qualified premium (illustration): IRS-style split → $15,000 ÷ 3 ≈ $5,000 premium toward §225 (under the $12,500 cap).

2. If stub lists OT premium = $5,000: use that figure when it matches FLSA premium.

3. North Carolina: The federal deduction generally does not remove corresponding OT from the NC base.

Special schedules (comp time, §207(k) periods, double-time) need the matching IRS examples—do not force one formula.

Action timeline

1. Now: Keep year-end stubs, OT detail, and documentation of nonexempt status (federal employees: SF-50 FLSA block).

2. 2025 filing: Compute under Notice 2025-69 / Schedule 1-A; retain workpapers if the employer did not break out premium.

3. 2026+: Confirm separate W-2/1099 reporting with payroll; only FLSA premium should be coded as qualified.

4. Withholding: Do not assume paychecks exclude income tax on OT; this is a return-level deduction.

5. NC Form D-400: Do not subtract the federal OT deduction as a state adjustment unless NCDOR later says otherwise.

What YCL can do

1. Split FLSA premium vs. gross OT and model §225 + MAGI phase-out.

2. High-level screen for likely exempt / non-qualified arrangements (DOL facts control).

3. Schedule 1-A workpapers and federal vs. NC explanation.

4. MFJ households combining both spouses’ qualified OT under the $25,000 joint cap.

5. Bilingual compliance planning with CPA Chenchen Liu and Gloria in Cary/RTP and Shanghai.

FAQ

Q: Is all overtime federal-tax-free now?

A: No. Only the FLSA-required premium, subject to caps and phase-out. The regular-rate portion remains taxable.

Q: Does North Carolina still tax overtime?

A: Yes under state rules. NCDOR: the federal OT deduction does not reduce NC taxable income—OT stays in the AGI-based NC computation.

Q: Employer pays double-time—do I deduct twice as much?

A: Usually not. IRS limits the qualified amount to the premium needed to satisfy FLSA.

Book a consult

YCL Tax, Accounting & Advisory

Web: yclcpa.com ｜ Email: info@yclcpa.com

Phone: 919-802-8376 / 980-202-0666 ｜ WeChat: YCLUSA

U.S. office: 1140 Kildaire Farm Rd. STE 208, Cary, NC 27511

Shanghai office: 2-516, Zhongye Xiangteng Plaza, Lane 31, Jiatong Road, Shanghai

Disclaimer

General information only—not tax, legal, or investment advice. Outcomes depend on FLSA status, pay practices, MAGI, and current federal/state law. Follow IRS, DOL, and NCDOR updates. Items marked 待核 need pre-filing verification. Consult a licensed professional for advice specific to you.