Millions of taxpayers have rushed to file for President Donald Trump’s new “no tax on overtime” deduction, but tax experts caution that this may lead to errors on returns. This deduction, part of Trump’s extensive tax reform, offers specific workers the opportunity to deduct as much as $12,500 for single filers or $25,000 for married couples filing jointly. This provision is applicable for the tax years 2025 through 2028.
The deduction can be applied using a new form, Schedule 1-A, which integrates into individual tax returns. This form also includes fresh tax breaks targeting tip income, seniors, and auto loan interest. As of early March, the IRS reported receipt of nearly 56 million returns, with 43% incorporating Schedule 1-A. The overtime deduction has become the predominant filing category for this particular form, according to Frank Bisignano, the Social Security Administration Commissioner and IRS CEO, during a recent House Ways and Means Committee hearing.
However, the overtime deduction is limited to certain types of earnings. To qualify, workers must have compensation that falls under the Fair Labor Standards Act (FLSA). This federal law mandates that non-exempt employees earn at least 1.5 times their standard hourly rate for hours exceeding 40 in a week. Despite a significant number of workers qualifying for overtime—close to 98 million employed individuals in 2023—only a small fraction of hourly (8%) and salaried (4%) workers regularly benefit from FLSA-qualified overtime.
Sectors such as manufacturing, health care, transportation, and public safety typically see a higher concentration of overtime pay, according to reports from various think tanks.
As taxpayers navigate this new deduction for the current filing season, confusion persists concerning the correct amounts to claim. In a significant change introduced by the U.S. Department of the Treasury and IRS last November, employers will not be mandated to report certain overtime earnings for the 2025 tax year. This means many workers may find their overtime earnings absent from usual information returns like Forms W-2 or 1099.
Instead, employees might have to rely on payroll records or final pay stubs to calculate their overtime earnings. However, the deduction specifically applies to the “overtime premium,” defined as the half portion above the regular hourly wage. Experts express concern that many filers might overstate this deduction.
Tom O’Saben, Director of Tax Content and Government Relations at the National Association of Tax Professionals, noted that individuals could miscalculate their overtime deductions, leading to inflated claims. “If you receive a lump sum on your payroll statement, you might need to divide that by three for 1.5 times your regular pay, or by four for double your normal rate,” he explained.
While there is currently no concrete evidence of widespread overclaiming, concerns remain about potential mistakes. Andrew Lautz, Director of Tax Policy at the Bipartisan Policy Center, warned about the possibility of honest errors stemming from the lack of employer reporting. Some filers may even feel tempted to exaggerate their earnings, while others might opt out of claiming the deduction entirely to sidestep potential complications.
Given the complexities and uncertainties surrounding the overtime deduction, tax professionals urge careful consideration and accurate reporting to avoid problems as taxpayers look to take advantage of this new tax benefit.
