FLSA Overtime Tax Implications
Summary
Effective in tax years 2025-2028, federal law allows eligible employees to deduct the premium portion of qualified overtime pay (the "half" in "time and a half") when they file their personal taxes. If employees have qualifying Fair Labor Standards Act (FLSA) overtime pay for hours worked above 40 hours in a workweek, their Form W-2 will show the premium portion of qualified FLSA overtime compensation received for the year. Overtime pay received for hours less than 40 hours worked per workweek is not considered FLSA overtime and is not included in the overtime tax deduction.
What Qualifies
- The deduction only applies to non-exempt hourly employees who physically work more than 40 hours in a workweek and get FLSA overtime pay.
- Overtime pay for less than 40 hours physically worked in a workweek does not qualify.
All of your overtime pay does not automatically qualify as a tax deduction when you file your personal income taxes.
How it works
- This law does not change how employees are paid or how taxes are withheld from their paychecks. Any potential tax benefit from overtime pay will only be realized when filing your annual federal tax return, not in your paycheck.
- Form W-2 will indicate the dollar amount of the qualified overtime premium portion of pay for hours worked over 40 in a workweek (in box 14). Overtime premium is the term for the extra half portion of overtime pay (the "half" in “time and a half”).
- The amount reported on Form W-2 may not match the overtime pay received by the university since overtime pay at the University of Illinois System is different than FLSA overtime requirements (see below).
Difference Between FLSA Overtime and University Overtime
FLSA overtime
The Fair Labor Standards Act (FLSA) mandates that eligible employees who physically work more than 40 hours in a workweek must receive overtime pay of time and a half.
- Only time physically worked is considered towards the calculation of overtime.
- The "half" portion of “time and a half” is considered the FLSA overtime premium for hours actually worked over 40 in a workweek. This is the amount that may qualify for the tax deduction.
University of Illinois System overtime
The University of Illinois System overtime policy complies with federal, state, and collective bargaining requirements. Some of these state and collective bargaining requirements provide additional overtime benefits. Because of these differences, not all overtime paid by the university qualifies as FLSA overtime.
- Paid time off (such as holiday, floating holiday, vacation, sick time, and other non-work pay) is included in the calculation of overtime for eligible employees. However, paid time off does not count as “hours worked” for qualified FLSA overtime and is excluded from the federal overtime tax deduction.
- The university may pay overtime premiums for hours physically worked at or below 40 hours in a workweek, such as daily overtime, 37.5-hour schedules, or collective bargaining requirements. Overtime paid for 40 or fewer hours physically worked does not qualify for the federal overtime tax deduction.
Key Distinction
- FLSA overtime is based solely on hours actually worked over 40 in a workweek.
- University overtime may be triggered earlier (e.g., daily overtime, 37.5-hour schedules, collective bargaining premiums) and may include paid time not worked (such as vacation or sick leave).
As a result, employees may receive university overtime pay even when no FLSA overtime has occurred.
Comparison
| Topic |
FLSA (Federal baseline) |
University of Illinois System policy |
| When overtime starts for eligible employees |
- Above 40 hours physically worked in a workweek
- Daily overtime not recognized
|
- Over the standard workweek of 37.5 or 40 hours
- Daily overtime for hours over the scheduled shift (7.5 or 8), if more advantageous
- In accordance with collective bargaining agreements
|
| Paid time not physically worked |
Not included by FLSA in overtime calculations |
Included in university overtime calculations (such as holiday, floating holiday, vacation, sick time, and other paid leave time) |
| Overtime premium reported on Form W-2 box 14 |
The FLSA premium portion only (the “½” in time and a half above 40 hours) |
Non-FLSA overtime is not reported on Form W-2 box 14 |
Examples
The examples below explain how overtime is calculated under university policy versus FLSA, and how those differences affect which portion of overtime pay may qualify for a federal tax deduction.
Assumptions
- Overtime-eligible (non-exempt) employee
- Regular rate of pay: $20.00 per hour
- Overtime premium portion (“the half” in “time and a half”): $10.00 per hour
- Examples A–C: 37.5-hour workweek (7.5 hours/day)
- Examples D–E: 40-hour workweek (8 hours/day)
Example A: Daily overtime below 40 hours (37.5 hr schedule)
The employee works a 9-hour day once during the week and 7.5 hours on other days, totaling 39 hours worked.
University Overtime: 1.5 hours paid due to daily overtime ($15.00).
FLSA Overtime: None.
Form W-2: No portion qualifies as FLSA reportable overtime.
| Earnings |
Sunday |
Monday |
Tuesday |
Wednesday |
Thursday |
Friday |
Saturday |
Weekly Total |
| Hours Worked |
0 |
7.5 |
9 |
7.5 |
7.5 |
7.5 |
0 |
39 |
| FLSA eligible OT reported |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| University OT paid |
0 |
0 |
1.5 |
0 |
0 |
0 |
0 |
1.5 |
Example B: 42 hours worked with daily overtime (37.5 hr schedule)
The employee works three 9-hour days and two 7.5-hour days, totaling 42 hours worked.
University Overtime: 4.5 hours paid ($45.00).
FLSA Overtime: 2 hours ($20.00).
Form W-2: Only the premium portion of the 2 FLSA overtime hours qualifies, so $20.00 will be included in Form W-2 overtime premium reporting.
| Earnings |
Sunday |
Monday |
Tuesday |
Wednesday |
Thursday |
Friday |
Saturday |
Weekly Total |
| Hours Worked |
0 |
7.5 |
9 |
9 |
9 |
7.5 |
0 |
42 |
| FLSA eligible OT reported |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
2 |
| University OT paid |
0 |
0 |
1.5 |
1.5 |
1.5 |
0 |
0 |
4.5 |
Example C: Paid leave with daily overtime (37.5 hr schedule)
The employee works 34.5 hours and uses 7.5 hours of vacation, totaling 42 paid hours.
University Overtime: 4.5 hours paid ($45.00).
FLSA Overtime: None.
Form W-2: No portion qualifies as FLSA reportable overtime.
| Earnings |
Sunday |
Monday |
Tuesday |
Wednesday |
Thursday |
Friday |
Saturday |
Weekly Total |
| Hours Worked |
0 |
0 |
9 |
9 |
9 |
7.5 |
0 |
34.5 |
| Vacation Hours |
0 |
7.5 |
0 |
0 |
0 |
0 |
0 |
7.5 |
| FLSA eligible OT reported |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| University OT paid |
0 |
0 |
1.5 |
1.5 |
1.5 |
0 |
0 |
4.5 |
Example D: Sick leave with extra day worked (40 hr schedule)
The employee works 40 hours and uses 8 hours of sick leave, totaling 48 paid hours.
University Overtime: 8 hours paid ($80.00).
FLSA Overtime: None.
Form W-2: No portion qualifies as FLSA reportable overtime.
| Earnings |
Sunday |
Monday |
Tuesday |
Wednesday |
Thursday |
Friday |
Saturday |
Weekly Total |
| Hours Worked |
0 |
0 |
8 |
8 |
8 |
8 |
8 |
40 |
| Sick Hours |
0 |
8 |
0 |
0 |
0 |
0 |
0 |
8 |
| FLSA eligible OT reported |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| University OT paid |
0 |
0 |
0 |
0 |
0 |
0 |
8 |
8 |
Example E: Sick leave and overtime work (40 hr schedule)
The employee works 45 hours and uses 8 hours of sick leave.
University Overtime: 13 hours paid ($130.00).
FLSA Overtime: 5 hours ($50.00).
Form W-2: Only the premium portion of the 5 FLSA overtime hours qualifies, so $50.00 will be included in Form W-2 overtime premium reporting.
| Earnings |
Sunday |
Monday |
Tuesday |
Wednesday |
Thursday |
Friday |
Saturday |
Weekly Total |
| Hours Worked |
0 |
0 |
9 |
9 |
9 |
9 |
9 |
45 |
| Sick Hours |
0 |
8 |
0 |
0 |
0 |
0 |
0 |
8 |
| FLSA eligible OT reported |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
5 |
| University OT paid |
0 |
0 |
1 |
1 |
1 |
1 |
9 |
13 |
If you physically work more than 40 hours in a workweek, the overtime premium—the extra “half” of time-and-a-half—shown on Form W-2 may qualify as a tax deduction on your personal tax return. Any other overtime pay does not qualify.
Sources