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Millions of taxpayers have already claimed President Donald Trump’s new “tax-free overtime” deduction. But experts say some filers are at risk of making mistakes on their tax returns.
The excess tax cuts, enacted by President Trump’s “Big and Beautiful Act,” would allow certain workers to deduct up to $12,500 annually from 2025 to 2028 for single filers and up to $25,000 for married couples filing jointly.
This deduction is made in a new form known as Schedule 1-A and is reflected on an individual’s tax return. The plan also includes President Trump’s new tax cuts on tip income, seniors and auto loan interest rates.
As of March 4, the IRS had received about 56 million returns, 43% of which included Schedule 1-A, Social Security Administration Administrator and IRS CEO Frank Bisignano said at a House Ways and Means Committee hearing this week. He said overtime deductions are the “largest filing category” on the application.
The IRS says Trump’s overtime deduction only applies to certain types of income.
Requires compensation covered under the Fair Labor Standards Act (FLSA). The law states that non-exempt employees must receive at least 1.5 times their regular pay for hours worked in excess of 40 hours per week. However, some workers who are subject to state or labor contract obligations are excluded.
Approximately 98 million employed workers were eligible for overtime under the FLSA in 2023, according to a 2024 analysis by the Yale Budget Lab. However, only 8% of hourly workers and 4% of salaried workers regularly work FLSA-certified overtime.
Overtime pay is typically concentrated in sectors such as manufacturing, health care, transportation and public safety, according to a Feb. 10 report from the Cato Institute, a libertarian think tank.
Reasons why overtime deductions may be incorrect
Experts say it may not be clear for workers this filing season how much overtime they should claim.
In November, the U.S. Treasury Department and IRS waived reporting requirements for employers for the 2025 tax year. That means some workers will no longer have their overtime reported on so-called information filings such as Forms W-2 and 1099s.
Instead, some workers may need a pay stub or 2025 final pay stub to calculate overtime totals. However, only the “overtime premium” will be deducted, and if overtime work is 1.5 times the normal amount, it will be deducted by half.
I think that deduction may be greatly exaggerated.
tom oseiben
Director of Tax Content and Government Relations, National Association of Tax Professionals
“I think that deduction may be significantly overstated,” Tom Oseven, director of tax content and government relations at the National Association of Tax Professionals, told CNBC.
According to the IRS, if a lump sum appears on your pay stub, overtime pay is calculated by dividing by 3 for 1.5 times your regular salary and dividing by 4 for 2 times your regular salary.
Andrew Lautz, director of tax policy at the Bipartisan Policy Center, a nonprofit think tank, said there’s no evidence that filers are overclaiming overtime deductions, but “that’s definitely a theoretical concern of mine.” “People just make honest mistakes,” he says.
Alternatively, if overtime pay is not reported on a tax return, certain filers may “take a gamble” by inflating their income, while filers with lower overtime hours may skip deductions to avoid problems, Lautz said.
“These are all possibilities given the lack of employer reporting mechanisms in place,” he said.
