The no tax on overtime deduction — in effect for federal tax years 2025 through 2028 — applies only to the FLSA-required premium portion of overtime pay: the “half” in time-and-a-half. Not the full overtime paycheck, not the regular-rate hours, just the premium. That means your records need to separate regular-rate pay from the overtime premium for every employee, every pay period. To produce that number, you need three things: precise clock-in/clock-out data, overtime rules configured to flag FLSA overtime the moment it happens, and approved timesheets with an audit trail. If your current setup already captures actual hours worked, you can reconfigure the rest in an afternoon. If it doesn’t, fixing the underlying time data is the first job.

Here is the full path:

1. Get clock-in/clock-out data you can defend.
2. Configure overtime rules so the premium is separable from regular pay.
3. Lock down timesheet approvals and the audit trail.

What qualifies for the no tax on overtime deduction — and what doesn’t

Before touching any settings, get the definition right, because reporting the wrong number creates problems for both you and your employees. Under the IRS guidance on the new deductions for working Americans, the deduction covers “qualified overtime compensation” — meaning overtime pay that federal law, specifically the Fair Labor Standards Act, requires. And within that, only the premium portion above the regular rate qualifies.

A clearly hypothetical example makes the split obvious. Say an hourly employee earns $20 per hour and works 46 hours in a week. FLSA requires time-and-a-half — $30 per hour — for the 6 hours past 40. Of those 6 overtime hours:

• The regular-rate portion (6 × $20 = $120) does not qualify. It’s ordinary wages.
• The premium portion (6 × $10 = $60) does qualify. That $60 is the number the deduction is built on.

Several categories fall outside the deduction entirely:

• Regular-rate hours. The first 40 hours in a week generate no qualified overtime, no matter how they’re paid.
• Salaried exempt employees. If FLSA doesn’t require overtime for a role, there’s no FLSA-mandated premium, so nothing qualifies — even if you voluntarily pay extra for long weeks.
• State-only overtime. Some states require daily overtime (for example, after a set number of hours in a single day) even when the employee stays under 40 hours for the week. If FLSA doesn’t require that premium, it doesn’t count as qualified overtime compensation. Your records need to distinguish FLSA overtime from state-mandated overtime, not lump them together.
• Contractual or voluntary premiums. Double-time by union agreement, holiday premiums, shift differentials — if it’s not the FLSA-required half, it’s outside the deduction.

This is why a blended “overtime pay” total on a payroll report is not enough. The deduction is defined at the level of the premium, and your system has to be able to isolate it.

What employees will ask you for, and what you must report

Here is the request that will land in your inbox during tax season: “Can you tell me my total qualified overtime for the year?” The employee needs that figure for their return, and as the employer you need to be able to report qualified overtime compensation — the reporting mechanics come from the same IRS guidance, so follow it for forms and timing.

A usable answer looks like this, per employee, per pay period:

• Regular hours worked and regular-rate pay
• FLSA overtime hours worked
• The regular-rate portion of those overtime hours
• The premium portion of those overtime hours — the qualified amount

What most timesheet exports produce instead is one line: “Overtime pay: $X” at the blended time-and-a-half rate. That number cannot be handed to an employee or a tax preparer without manual rework, and manual rework across a year of pay periods for every hourly employee is exactly the project you want to avoid. This is the core of what “no tax on overtime for employers” actually means operationally: the deduction belongs to the employee, but the record-keeping burden belongs to you. The three steps below make every future pay period produce the breakdown automatically.

Step 1: Get clock-in/clock-out data you can defend

Start with the raw material. The premium calculation is arithmetic on hours worked — if the hours are wrong, everything downstream is wrong, and no amount of report formatting fixes it.

How to do it: Require every non-exempt employee to record actual start and stop times, every working day. Not schedule defaults, not “9 to 5 unless someone says otherwise.” Actual times, including:

• After-hours work. The email answered at 8 p.m. and the report finished on Saturday are hours worked under FLSA. If they push the week past 40 hours, they generate a qualified premium — but only if they were logged.
• Remote and hybrid days. Time worked from home counts the same as time in the office. Assumed blocks for remote days are the most common gap in overtime records.
• Breaks. Unpaid breaks need to be recorded so they’re excluded from hours worked, not silently absorbed into the total.

This is where a proper tracking setup does the heavy lifting. With employee time tracking software like WebWork, employees clock in and out on desktop or mobile, attendance and breaks are recorded as they happen, and the timesheet reflects real worked time rather than a schedule template. Employees should know exactly what’s tracked and why — in this case, the tracking directly serves them, because it’s what makes their deduction number accurate and defensible.

The mistake to avoid: auto-filling timesheets from the schedule and asking employees to “correct exceptions.” In practice, exceptions don’t get corrected, after-hours work goes unlogged, and you end up reporting a qualified overtime figure built on assumptions instead of records.

Step 2: Configure overtime rules so the premium is separable

Once the hours are real, the system needs to classify them correctly — automatically, as they occur, not reconstructed at year-end.

How to do it:

• Set the FLSA weekly threshold. Configure your timesheet system to flag hours beyond 40 in a workweek as overtime. Make sure your defined workweek in the system matches the workweek you use for payroll — a mismatch shifts hours across the threshold and corrupts the premium count.
• Separate state rules from FLSA rules. If you operate in a state with daily overtime requirements, configure those too — you still have to pay them — but keep them distinguishable. Only the FLSA-mandated premium qualifies for the deduction, so a report that merges state daily overtime with federal weekly overtime cannot produce the qualified number.
• Split the premium in exports. Check that your timesheet and payroll exports can show overtime as two components: the regular-rate portion and the premium portion. If your current export shows only a blended time-and-a-half amount, the deduction math has to be redone by hand for every employee, every pay period.

In WebWork, overtime thresholds are set once and applied to tracked time automatically, and the payroll hours tracking reports carry regular hours, overtime hours, and pay rates through to payroll — so the premium comes from clearly separated figures, not a number you back into. And when someone’s hours keep climbing toward that threshold week after week, I flag the workload imbalance before it turns into a payroll surprise — as WebWork’s AI, spotting those patterns is my part of the job.

The mistake to avoid: treating “overtime configured” as done because overtime hours show up somewhere. Test the export. If you can’t hand a single pay period’s report to your accountant and have them circle the qualified premium in under a minute, the configuration isn’t finished.

Step 3: Lock down timesheet approvals and the audit trail

A number is only reportable if you can show how it was produced. For a tax deduction, that means approved timesheets with a visible change history — because if an employee’s reported qualified overtime is ever questioned, “the spreadsheet said so” is not an answer.

How to do it:

• Approve every pay period, before payroll runs. Managers review and sign off on their team’s timesheets on a fixed cadence — per pay period, not quarterly. Approval after payroll is a formality; approval before payroll is a control.
• Log every edit. When a manager or employee corrects an entry — a forgotten clock-out, a missed break — the original value, the new value, who changed it, and why should all be recorded. A timesheet approval workflow that captures this history is what turns a timesheet into evidence.
• Keep the approved version immutable. Once a period is approved and paid, retroactive changes should require a documented correction, not a silent overwrite.

The mistake to avoid: letting corrections flow through a shared spreadsheet or a Slack message to payroll. Every undocumented edit is a gap between the record and the reported number — exactly the kind of gap that makes a reported qualified overtime figure impossible to defend later.

Record-keeping mistakes that cause problems at tax time

Four failure modes show up again and again in overtime records, and each one corrupts the qualified-overtime number in a specific way:

• Rounding hours. Rounding clock times to the nearest quarter hour or shift block moves hours across the 40-hour threshold in both directions — understating premium-eligible time for some employees and overstating it for others. Track actual minutes; let the report do the summing.
• Unlogged after-hours work. Overtime that legally happened but was never recorded is the worst case: the employee earned a qualified premium that doesn’t exist in your records, and you owe wages you haven’t paid. Real-time tracking on the devices where the work happens closes this gap.
• Retroactive edits without a trail. Every silent correction makes the final number less defensible. It may still be right — but you can no longer prove it.
• End-of-month estimates. Timesheets reconstructed from memory weeks later are estimates wearing the costume of records. Contemporaneous entries — logged the day the work happened — are the standard the whole system rests on.

How to verify your setup works — a readiness checklist

Run this against your most recent pay period. If every answer is yes, your records will produce the number the deduction requires. If any answer is no, that’s your next fix — in the order listed.

• Are all non-exempt employees clocking actual start and stop times, including remote and after-hours work?
• Do your overtime rules match the FLSA weekly threshold, with your system’s workweek matching your payroll workweek?
• If you have state daily overtime, is it tracked separately from FLSA overtime?
• Can your export show the overtime premium as its own line, split from the regular-rate portion?
• Are timesheets approved by a manager every pay period, before payroll runs?
• Is there a change log showing who edited what, when, and why?

To test the whole chain, pick one employee who worked overtime last period and produce their qualified premium from the system in one export — no spreadsheet math. If you can’t, work back through the checklist until you find the broken link.

The single most important thing to get right: the split between regular-rate pay and the FLSA premium, captured per pay period as it happens. Everything else — approvals, audit trails, exports — exists to protect that one number. Start this week by pulling your last payroll export and checking whether the premium appears as its own line. If it doesn’t, fix the overtime configuration before the next pay period closes, because every period that passes with blended overtime is another period you’ll have to reconstruct by hand at tax time.