Overtime Tax Deduction and FLSA Exemptions: What Workers Must Know

Overtime Tax Deduction and FLSA Exemptions: What Workers Must Know

While most tax professionals understand that workers may be able to claim up to a $25,000 deduction for overtime paid under section 7 of the Fair Labor and Standards Act, there are a lot of open questions regarding what it means to be subject to section 7 of the FLSA.

We know that if a worker qualifies for overtime under state law, but doesn’t work more than 40 hours per week, the worker cannot claim the deduction. For example, even if a state law provides for overtime pay when a worker works more than 8 hours in a day, the worker cannot claim the deduction for overtime paid unless they work more than 40 hours per week.

However, tax professionals also need to have a general understanding of which workers are exempt from the FLSA’s section 7 overtime requirements and understand that an exemption makes those workers ineligible to claim the overtime deduction. Today we’ll provide a general overview of some common exemptions. A labor attorney should be consulted if there’s a question about whether a specific exemption applies.

The exemptions are primarily contained in Title 29 of the U.S. Code, section 213. Some of the more common exemptions apply to the following workers.

• Administrative, executive, and professional or white-collar employees are exempt as long as they’re paid the required minimum salary applicable to the calendar year.

• Certain agricultural and fishing operation employees are exempt.

• Commissioned sales employees of retail or service establishments are exempt if more than half of the employee’s earnings are from commissions and the employee averages at least one and one-half times the minimum wage for each hour worked, and salespeople customarily and regularly are engaged away from the employer’s place of business.

• Computer systems analysts, computer programmers, software engineers, and other similarly skilled computer workers are exempt if they meet certain tests regarding their job duties, are paid at least the standard salary level on a salary basis, or are paid on an hourly basis at a rate not less than $27.63 an hour. The exemption does not apply to employees engaged in the manufacture or repair of computer hardware or related equipment.

• Hospital or certain residential care facility employees are exempt if they have certain agreements with their employers, as are companions to the elderly and infirm, and live-in domestic service workers.

• Employees of railroads and air carriers, taxi drivers, certain employees of motor carriers, seamen on American vessels, and local delivery employees paid on approved trip rate plans are exempt. For example, we’ve heard that certain FedEx employees have received notices alerting them that they do not qualify for the overtime deduction.

• Municipal workers, firefighters, and law enforcement officers that have agreed to alternative workday periods and compensation packages are exempt.

• Seasonal and recreational establishment employees and motion picture theater employees are exempt.

A full listing of the exemptions, as well as fact sheets explaining these exemptions, can be found on the U.S. Department of Labor’s website. Also, the IRS just released Fact Sheet 2026-01 reminding taxpayers that if they’re exempt from the FLSA overtime requirements, they do not qualify for the deduction.

Overtime Tax Deduction and FLSA Exemptions: What Workers Must Know. To listen to this podcast, go to: https://traffic.libsyn.com/3abc36a0-3ad2-42d1-b492-5741db3adc14/FTM_01-27-26.mp3