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On January 23rd, 2026, the Department of the Treasury (DOT) and the Internal Revenue Service (IRS) issued new Frequently Asked Questions (FAQs). Specifically, Fact Sheet 2026-01 addresses the new deduction for qualified overtime compensation under the One Big Beautiful Bill (OBBB). Overall, for tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the amount in certain situations. The FAQs released in late January address questions for both employers and employees about how the deduction works. In November 2025, the two agencies issued joint guidance involving tip and overtime information reporting and penalties. Specifically, the guidance explains reporting penalty relief available to employers for tax year 2025 under the OBBB.
Overview of the Qualified Overtime Compensation FAQs
In general, the FAQs released on January 23 contain additional information about the deduction. It also provides resources for employees (including federal employees) to help them determine whether they received qualified overtime compensation under the Fair Labor Standards Act (FLSA). Finally, the FAQs include useful information on the differences in reporting requirements for tax years 2025 and 2026-2028.
The Fair Labor Standards Act
As the nation’s primary wage law and one of the major employment laws employers must follow, the FLSA establishes minimum wage and overtime protections for non-exempt part-time and full-time employees. However, under section 13(a)(1) of the FLSA, employees paid above the FLSA’s current salary basis are generally exempt from overtime provisions. To qualify for an overtime exemption, employees must have been paid on a salary basis at a rate of at least $684 per week. These exempt employees must also perform at least one duty of an executive, administrative, or professional employee. These duties include:
- company or departmental management;
- regularly directing work;
- hiring, firing, promoting, or suggesting such employment actions;
- exercising discretion and independent judgment in matters of significance;
- performing work that requires advanced knowledge in science or learning acquired through specialized academic training; and
- using originality, talent, imagination, or invention in a recognized artistic or creative field.
Examples of Questions from the Qualified Overtime Compensation FAQs
Chiefly, the recently released Fact Sheet 2026-01 contains eight questions addressing the new qualified overtime compensation deduction. Examples of those questions include:
- What is considered a qualified overtime compensation for purposes of the deduction?
- How do I determine [who is] an FLSA overtime-eligible employee?
- What is the deduction amount?
- Are there other rules that apply to the deduction?
Employer Takeaways
In conclusion, even though the OBBB was signed into law on July 4th, 2025, many federal agencies are still racing to update laws and regulations that were current as of last year. Accordingly, employers can use these FAQs to ensure compliance with new IRS and DOT provisions. Additionally, employers should contact their business legal counsel or financial advisor if there are any further questions about qualified overtime compensation deductions.
