How the New Overtime Deduction Works for 2025 (Filed in 2026): Pay Stub vs. W-2 Explained

Many workers are hearing about a new overtime tax deduction and assuming it works like the Earned Income Tax Credit or another refundable credit.

It doesn’t.

Overtime is not a separate tax credit you claim. Instead, a new law temporarily changes how certain overtime pay is treated for tax purposes from 2025 through 2028, starting with 2025 tax returns filed in 2026.

The biggest source of confusion?
Which number to use — your pay stub or your W-2.

Here’s what taxpayers need to know.

Overtime Is Not a Credit — It’s a Deduction

First, let’s clear up the most common misunderstanding.

• Overtime pay is still part of your wages
• You do not claim overtime the way you claim EITC or CTC
• The new rule allows a deduction for the qualified overtime premium portion, not the full overtime amount

This deduction reduces taxable income, not tax owed dollar-for-dollar like a credit.

Pay Stub vs. W-2: Which Number Actually Matters?

Your W-2 Is the Official Tax Document

Your Form W-2 is the controlling document the IRS uses. It reports:

• Total taxable wages (Box 1)
• Other wage categories in additional boxes

Under the new overtime rules, employers may (or eventually will be required to):

• Separately report “qualified overtime” on the W-2
• Use a specific box (such as Box 12 with a new code or Box 14)
• Or provide a separate year-end overtime statement

👉 If your W-2 or employer statement shows a “qualified overtime” amount, that is the number you use.

Why Your Last Pay Stub Can Be Misleading

Your final pay stub:

• Shows payroll detail
• Is useful for tracking earnings
• Is not the official tax document

The overtime amount on your pay stub may:

• Include non-qualifying overtime
• Include bonuses or holiday pay
• Include amounts that don’t meet IRS definitions

This is why pay stubs often do not match the final qualified overtime figure used for tax purposes.

What Counts as “Qualified Overtime”? (High-Level Overview)

The new law allows a deduction for the overtime premium portion required by federal law — generally the “extra half” in time-and-a-half pay.

That means:

• Only overtime required under the Fair Labor Standards Act (FLSA) qualifies
• Only the premium portion above your regular rate qualifies
• Not all overtime, bonuses, or holiday pay count

As a result:

• Your total overtime dollars on a pay stub may be higher than the deductible amount
• Employers or payroll systems calculate the qualified portion under technical rules

This is exactly why you should not guess or self-calculate unless absolutely necessary.

Best Way to Claim the Overtime Deduction (Safest Approach)

For 2025 overtime claimed on your 2025 return (filed in 2026), follow this order:

1. Start With Your W-2 or Employer Statement

Look for:

• “Qualified Overtime”
• “QOT”
• A specific W-2 box entry (such as Box 12 or 14)
• A separate year-end overtime notice

If it’s provided, use that number. It is your employer’s official calculation.

2. Use Pay Stubs Only as Backup

If your employer does not provide a separate qualified overtime figure:

• IRS guidance may allow reasonable methods using payroll records
• This often requires calculating only the premium portion
• This is more complex and best handled by software or a tax professional

Pay stubs should be used to:

• Verify numbers
• Flag errors
• Support corrections — not as the primary source

3. Let Software or a Pro Handle the Form Placement

The overtime deduction:

• Is claimed on a specific line or schedule
• Is attached to Form 1040
• Is not entered as a credit

Quality tax software will ask:

“Did you receive qualified overtime?”

You then enter the official amount, and the software applies:

• Limits
• Phase-outs
• Proper calculations

What You Should NOT Do

Avoid these common mistakes:

• ❌ Do not total the “overtime” line from your last paycheck and deduct it
• ❌ Do not ignore a W-2 or employer statement showing a lower qualified amount
• ❌ Do not treat overtime like a refundable credit

The IRS will compare what you claim to what your employer reports.

Practical Takeaway (Share This With Workers)

• Always check your W-2 first for a qualified overtime figure
• Use pay stubs only to verify or question discrepancies
• Claim overtime as a deduction, not a credit
• Use reputable software or a tax professional for accuracy

The new overtime deduction can reduce taxable income — but only when claimed correctly.

Bottom Line

The overtime deduction for 2025–2028 is a meaningful tax change, but it’s also highly technical. The safest path is simple:

Trust your W-2, not your last pay stub.

Doing so helps you claim what you’re entitled to — without creating IRS problems later.