Last weekend I was in Oregon for my annual 200-mile running relay. Every year I get together with college fraternity friends in a different location, and we run through the night, contemplating life, retirement planning, the previous year’s surgeries, how little sleep we are getting in the van, and the unexpected benefit of realizing that not sleeping also means not waking up in the middle of the night having to pee.

This year we ran the Hood to Coast Relay, starting on the west side of Mt. Hood and ending in Seaside on the coast a day and a half later.

With all of us in our mid-to-late 50s, our hourly rate of speed isn’t spectacular. We are slow but steady.

Hourly rates are also on the minds of taxpayers, as the IRS has issued new guidance about deducting overtime pay. While most independent contractors do not receive overtime pay, there are scenarios in which some would be eligible for the deduction, and the new guidance addresses those rare situations.

As a general principle, overtime payments are only tax-deductible if the overtime is required by the FLSA. Voluntary overtime payments, such as through a contractual agreement, are not eligible for the tax deduction.

The guidance reminds taxpayers that anyone who owns 20% or more of a business is exempt from overtime as an executive, and so these individuals are not eligible for the exemption. (See Question 4.)

The guidance recognizes, however, that an individual may be deemed an employee under the Fair Labor Standards Act (FLSA) and its Economic Realities Test, while simultaneously being properly classified as a contractor under the Internal Revenue Code and its Right to Control Test.

This situation is rare but occasionally exists. Under these circumstances, qualified overtime would be reported to the taxpayer on a Form 1099-MISC or 1099-NEC instead of a Form W-2. (See Questions 6 and 7.)

Most independent contractors, if properly classified, will not be eligible for the overtime deduction. But businesses engaging ICs that qualify as employees under the FLSA should be aware of the updated reporting obligation.

Even when overtime qualifies for the deduction, the deductible amount is capped. The deduction is up to $12,500 of qualified overtime compensation earned for the year per individual tax return, or $25,000 in the case of a joint return. The deduction is reduced if the taxpayer’s modified adjusted gross income (MAGI) for the tax year exceeds $150,000, or $300,000 for joint filers.

I’m not sure the new guidance is anything that business owners and independent contractor taxpayers should lose sleep over. (It’s not like they’ve been running through the night on dark, hilly, rural roads.) But the new guidance is worth noting and filing away for end-of-year tax reporting.

© 2026 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.