The software believes that only a portion of the $1,120 is eligible for the qualified overtime deduction. The qualified overtime deduction is for overtime pay that is required by the 1939 Fairs Labor Standards Act. It is possible that a union contract pays an overtime pay that exceeds the requirements of the FLSA.
For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half their regular rate of pay for all hours worked over 40 in a workweek.
However, the overtime paid at more than 'time-and-a-half' is not considered a qualified overtime deduction. That is why the software is limiting the overtime to 1/3 of box 1. See the example of Brad in this IRS example.
Brad’s employer has a practice of paying overtime at a rate of two times an employee’s regular rate of pay, and Brad was paid $20,000 in overtime pay during 2025. Brad’s last pay stub for 2025 shows “overtime” of $20,000 paid in 2025. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Brad may include $5,000 ($20,000 divided by 4).
For the deduction for qualified overtime:
- Maximum annual deduction is $12,500 ($25,000 for joint filers).
- Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
- The deduction reduces federal income tax liability, it does not exempt overtime pay from Social Security and Medicare taxes. Employees will still owe these taxes on their overtime earnings.
- Taxpayers filing as married filing separately are not eligible for the deduction.
- The deduction is available for both itemizing and non-itemizing taxpayers.
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