The IRS has released new guidance in the form of frequently asked questions (FAQs) to help eligible taxpayers claim the overtime compensation deduction. The guidance explains how the new deduction for qualified overtime compensation works, who may be eligible, and how it will be reported—at least for now.

(And remember: as with tips, this is a deduction, not an exclusion. That’s important for reporting purposes.)

Here’s what you need to know.

The new deduction applies only to qualified overtime compensation. According to the IRS, qualified overtime compensation is the portion of overtime pay that is required under Section 7 of the Fair Labor Standards Act (FLSA) and that exceeds an employee’s regular rate of pay.

In practical terms, if a taxpayer is paid “one and one-half times” their regular rate for an hour of overtime work, the “half” portion of that payment—the amount above the regular rate—is treated as qualified overtime compensation.

If you are paid overtime under state or local law, or for another reason, but are not FLSA overtime-eligible, that pay does not qualify—no matter the circumstances.

You can’t deduct the entire overtime payment. The deductible amount is the portion that exceeds your regular rate of pay by law—the “half” portion of time-and-a-half compensation.

The IRS clarifies that while the additional half required by the FLSA may qualify, payments in excess of the FLSA-required premium do not. That means only the half is deductible, even if your overtime rate is two or three (or more) times your normal rate.

Whether you’re eligible to claim the deduction depends on you are FLSA overtime-eligible. Eligibility is facts and circumstances specific and depends on factors such as your occupation, job duties, and earnings. The Department of Labor (DOL) has some resources explaining FLSA coverage and exemptions.

Most employees in the United States are covered by the FLSA, but not everyone is. You’re typically covered if you work for a business engaged in interstate commerce, work........

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