Who Is — and Isn’t — Eligible for the New Overtime Deduction?

Recent tax updates have introduced a valuable opportunity for certain workers: a potential overtime deduction of up to $25,000 for qualifying overtime paid under Section 7 of the Fair Labor Standards Act (FLSA).

However, while the deduction sounds straightforward, eligibility is not. Many taxpayers — and even experienced professionals — are discovering that the rules depend heavily on whether the worker is actually subject to Section 7 overtime requirements under federal law.

At Velin & Associates, Inc., CPA Los Angeles, we are already helping business owners and employees understand how this deduction applies in real-world situations. Below is a detailed breakdown of who may qualify, who does not, and what business owners and employees should consider before claiming the deduction.

Understanding the Foundation: Section 7 of the FLSA

Section 7 of the FLSA generally requires employers to pay overtime (typically 1.5x the regular rate of pay) for hours worked over 40 hours in a workweek.

The key issue for tax purposes is this:

The overtime deduction applies only if the worker is subject to Section 7 of the FLSA.

If a worker is exempt from Section 7 — even if they receive overtime-like compensation — they do not qualify for the deduction.

Important Clarification: State Law vs. Federal Law

Many states, including California, require overtime pay in situations that go beyond federal law — such as overtime after 8 hours in a single day.

However:
⠀⠀
• If an employee works more than 8 hours in a day but does not exceed 40 hours in the week,
• And the overtime is triggered only by state law,
• The worker cannot claim the federal overtime deduction.

This distinction is extremely important for California workers.

Example: A creative industry employee regularly worked 10-hour production days but never exceeded 40 hours in a week. While they received daily overtime under California law, they did not qualify for the federal overtime deduction because they did not exceed the federal 40-hour threshold.

Proper analysis prevented an incorrect deduction claim that could have triggered IRS scrutiny.

Common FLSA Exemptions That Make Workers Ineligible

The FLSA contains numerous exemptions under Title 29, Section 213 of the U.S. Code. If a worker falls into one of these exemptions, they generally cannot claim the overtime deduction.

Below are some of the most common exemptions.

1. Administrative, Executive, and Professional (White Collar) Employees

These employees are exempt if:
⠀
• They meet specific job duty tests, and
• They are paid at least the required minimum salary threshold.

This category often includes:
⠀
• Corporate executives
• Managers
• Certain licensed professionals
• Many medical professionals
• High-level administrators

Example: A medical practice administrator earning a fixed annual salary contacted another firm. Although they regularly worked 50+ hours per week, they qualified under the executive exemption and were not eligible for the overtime deduction.

This is particularly relevant for medical practice clients and healthcare administrators.

2. Computer Professionals

Certain:
⠀
• Computer systems analysts
• Programmers
• Software engineers

are exempt if they:
⠀
• Meet specific job duty requirements, and
• Are paid at least the required salary level or hourly threshold.

However, the exemption does not apply to employees involved in manufacturing or repairing hardware.

This is important for technology entrepreneurs and online businesses working with in-house tech teams — including clients seeking a CPA for Commerce or an Online CPA for digital operations.

3. Commissioned Retail and Service Employees

Employees of retail or service establishments may be exempt if:
⠀
• More than half of their compensation comes from commissions, and
• Their average hourly earnings exceed 1.5 times the minimum wage.

This affects certain sales teams in:
⠀
• E-commerce
• Retail operations
• Service-based businesses

For example, some Shopify store owner and Amazon business owner clients employ commissioned sales representatives who may not qualify for the deduction due to exemption status.

4. Transportation Workers

Employees such as:
⠀
• Railroad workers
• Air carrier employees
• Taxi drivers
• Certain motor carrier employees
• Seamen

are typically exempt.

There have already been reports of transportation company employees receiving notices clarifying that they do not qualify for the deduction.

5. Agricultural and Fishing Workers

Certain workers in agricultural and fishing operations are exempt from Section 7 overtime rules.

6. Healthcare and Residential Care Employees

Certain hospital and residential care facility workers may qualify for exemptions if specific employment agreements apply.

This is particularly relevant in healthcare settings — which is why professional review is critical for clients seeking Tax Services Healthcare or a CPA for Doctors.

7. Municipal Workers and Public Safety

Certain:
⠀
• Firefighters
• Law enforcement officers
• Municipal employees

who work under alternative work schedules and compensation structures may be exempt.

8. Seasonal and Recreational Establishment Employees

This includes certain:
⠀
• Seasonal businesses
• Recreational establishments
• Motion picture theater employees

For clients in entertainment, including those seeking Tax Services for Entertainment or a CPA for Filmmakers, this exemption may be relevant.

What Business Owners Need to Know

For employers, this deduction creates additional compliance considerations:
⠀
• Proper worker classification is critical
• Payroll systems must accurately track FLSA overtime
• Misclassification can create both labor law and tax consequences
• Documentation is essential if a deduction is claimed

For example, an e-commerce client needed a payroll review to determine whether certain team leads were properly classified as exempt. The review ensured both wage law compliance and accurate tax reporting.

What Employees Should Do Before Claiming the Deduction

Before claiming up to $25,000 in overtime deductions, employees should confirm:

1. They worked more than 40 hours in a workweek.

2. They are subject to Section 7 of the FLSA.

3. They are not covered by a statutory exemption.

4. Their employer properly reported qualifying overtime wages.

5. They maintain adequate documentation.

This is especially important for:
⠀
• Content creator clients
• TikTokers
• Commerce entrepreneurs
• Healthcare professionals
• High-income earners

Incorrect claims may lead to audit adjustments, penalties, or amended returns.

Why Professional Review Matters

The overtime deduction intersects:
⠀
• Federal labor law
• Federal tax law
• State wage laws
• Payroll compliance

It is not a simple “did you get overtime pay?” question.

At Velin & Associates, Inc., an accounting firm in Los Angeles, we analyze:
⠀
• Worker classification
• Salary vs. hourly compensation structures
• Multi-state employment issues
• Payroll reporting
• Documentation compliance
• Deduction optimization strategies

Whether you are an employee, employer, healthcare professional, online business owner, or entertainment industry professional, proper analysis ensures both compliance and tax efficiency.

Strategic Tax Planning Beyond the Deduction

For many clients, the overtime deduction is just one part of a broader strategy that includes:
⠀
• Quarterly tax planning
• Business entity review
• Payroll structuring
• Bookkeeping and tax services
• Income optimization
• Audit risk management

As a CPA firm providing comprehensive Tax Services Los Angeles, we help individuals and businesses implement proactive tax strategies — not just form filing.

Final Thoughts

The new overtime deduction presents meaningful tax savings for qualifying workers. But eligibility depends entirely on whether the worker is subject to Section 7 of the FLSA and not covered by an exemption.

Because labor classification errors are common, both employees and employers should seek professional review before claiming the deduction.

If you need guidance, our team is ready to assist.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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