Can Salaried Employees Claim the Overtime Deduction?
Most salaried employees cannot. The IRC Section 225 overtime deduction requires FLSA non-exempt status, and most salaried workers are classified as exempt under the FLSA white-collar exemptions. However, some salaried employees are non-exempt and do qualify for the deduction, up to $12,500 (single) or $25,000(Married Filing Jointly) per year.
The FLSA exempt/non-exempt distinction
The Fair Labor Standards Act requires employers to pay overtime (at least time-and-a-half) for hours worked beyond 40 in a workweek. However, FLSA carves out several "white-collar" exemptions for employees who meet both a salary test and a duties test.
If you meet both tests for one of the exemption categories, you are classified as exempt, and your employer is not required to pay you overtime under federal law. Because there is no FLSA-mandated overtime, there is no qualifying overtime premium to deduct under IRC Section 225.
The two tests are:
- Salary basis test: You must be paid a predetermined, fixed salary that is not reduced based on the quality or quantity of work. The salary must meet or exceed the DOL's minimum salary threshold.
- Duties test: Your primary job duties must fall within one of the defined exemption categories (executive, administrative, professional, computer employee, or outside sales).
Failing either test means you are non-exempt, even if you receive a salary.
When salaried workers ARE non-exempt
Being paid a salary does not automatically make you exempt. Several situations can result in salaried workers being classified as FLSA non-exempt:
- Below the salary threshold: If your salary falls below the DOL's minimum for exemption, you are non-exempt regardless of your duties. The DOL periodically updates this threshold through rulemaking.
- Non-qualifying duties: Even with a salary above the threshold, if your primary duties do not meet any exemption's duties test, you remain non-exempt. For example, a salaried worker whose primary duties involve routine production work or manual labor would typically not meet the executive, administrative, or professional duties tests.
- First responders and similar roles: Police officers, firefighters, paramedics, and similar employees are generally non-exempt under FLSA, even if paid a salary.
- Practical nurses and technicians: Licensed practical nurses, medical technicians, and similar healthcare workers are typically non-exempt, distinguishing them from registered nurses or physicians who may qualify for the professional exemption.
If you are salaried and non-exempt, your employer must pay you overtime for hours over 40 per week. That overtime premium qualifies for the IRC Section 225 deduction, and your employer should report it under W-2 Box 12 Code TT.
Common exempt categories
These are the main FLSA exemption categories. If your role falls into one of these and you meet the salary threshold, you are likely exempt and not eligible for the overtime deduction:
- Executive exemption: Managers who supervise two or more employees, have hiring/firing authority (or meaningful input), and whose primary duty is management.
- Administrative exemption: Employees whose primary duty involves office or non-manual work related to business operations or management, exercising independent judgment and discretion on significant matters.
- Professional exemption: Employees in roles requiring advanced knowledge in a field of science or learning, typically acquired through prolonged, specialized education (e.g., attorneys, engineers, architects, accountants, physicians).
- Computer employee exemption: Systems analysts, programmers, software engineers, and similar workers whose primary duties involve systems analysis, programming, or software/hardware design.
- Outside sales exemption: Employees whose primary duty is making sales or obtaining orders, and who customarily work away from the employer's place of business.
These categories are defined by job duties, not job titles. A "manager" title alone does not make someone exempt; the actual work performed determines the classification.
What about state overtime laws?
Some states have overtime laws that differ from federal FLSA, and these differences can affect eligibility for the IRC Section 225 deduction:
- Broader coverage: Some states (such as California) apply overtime rules to workers who are exempt under federal FLSA. If your state requires your employer to pay you overtime, that state-mandated premium may qualify for the deduction.
- Daily overtime: California requires overtime after 8 hours in a single day, not just after 40 hours in a week. Overtime earned under this daily threshold rule still qualifies if it is required by state law.
- Higher salary thresholds: Some states set higher salary thresholds for exemption than the federal level. A worker who is exempt under FLSA but non-exempt under state law may earn qualifying overtime under the state statute.
The IRC Section 225 statute covers overtime required by "Federal or State law," so state-mandated overtime is eligible even if FLSA would not have required it.
To estimate your potential savings, use the No Tax on Overtime Calculator. For questions about your specific FLSA classification, consult your HR department or an employment attorney.