You Make the Call - Sept. 17, 2026

Question: Ethan is employed as an operations director for a manufacturing company and is a bona fide executive employee who is exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). Ethan receives an annual salary of $105,000. Under the company’s compensation policy, executives receive an additional $60 per hour when they work more than 45 hours in a workweek.

During 2026, Ethan frequently works more than 45 hours per week and receives $7,200 in additional compensation under the policy. His employer refers to these payments as “overtime pay.”

Can Ethan claim a §225 deduction for the $7,200 his employer paid as overtime?

Answer: No. Ethan cannot claim the §225 deduction for the $7,200 in additional compensation. Although his employer refers to the payments as overtime pay, Ethan is a bona fide executive employee who is exempt from the overtime requirements of the FLSA.

A bona fide executive employee who is exempt from the FLSA overtime requirements under §13(a)(1) generally cannot claim the §225 overtime deduction because any overtime compensation paid to the employee is not required under FLSA Section 7.

Section 225 allows a deduction for qualified overtime compensation, which is limited to overtime compensation required under Section 7 of the FLSA that exceeds the employee’s regular rate of pay. Because Ethan qualifies for the executive exemption under §13(a)(1) of the FLSA, he is exempt from the overtime requirements of FLSA Section 7.

The company’s voluntary policy of paying executives an additional $60 per hour after 45 hours does not change Ethan’s exempt status or make the additional compensation FLSA-required overtime. Therefore, the $7,200 Ethan receives under the company’s policy is not qualified overtime compensation under §225 and does not qualify for the overtime deduction.

Tax professionals should not rely solely on an employer’s characterization of a payment as “overtime.” To qualify for the §225 deduction, the compensation must be overtime required under FLSA Section 7 and only the portion of that FLSA-required overtime compensation that exceeds the employee’s regular rate is potentially deductible.