IRS Issues New Guidance on Federal Firefighter Overtime Deduction: Here's What You Need to Know

The IRS has released Notice 25-69, providing critical guidance on how federal firefighters can calculate and claim the overtime deduction for tax year 2025 under the One Big Beautiful Bill Act (OBBBA). If you've been following this issue since the law passed, you know the concept: only the "premium" portion of your overtime is tax-free. Now the IRS has confirmed exactly how to calculate it.

The Bottom Line

For federal firefighters working under FLSA Section 207(k), you'll divide your total overtime pay by 3 to determine your qualified overtime deduction. This simplified calculation gives you the same result as isolating the premium portion directly.

If you read my original article on the federal firefighter overtime deduction, the core concept hasn't changed—only the premium portion qualifies. The IRS has simply provided an easier calculation method for 2025.

Understanding the 207(k) Rules

Federal firefighters operate under unique overtime rules. Under FLSA Section 207(k), fire protection employees work on extended work periods rather than the standard 40-hour workweek. Most federal firefighters work a 28-day cycle, where overtime kicks in after 212 hours rather than after 40 hours per week.

When you work overtime, you earn time-and-a-half (1.5x your regular rate). This overtime payment consists of two parts:

• Your regular rate (1.0x) for those hours
• The premium portion (0.5x) that represents the "extra" compensation

Only the 0.5x premium portion is tax-free under the new law.

The IRS Calculation Method

The IRS guidance in Notice 25-69 provides a straightforward approach for 2025. Since employers aren't required to separately report the premium portion on W-2s this year, you can use what the IRS calls a "reasonable method" to calculate your deduction.

For firefighters paid at time-and-a-half (most federal firefighters), the method is simple:

Qualified Overtime Deduction = Total Overtime Pay ÷ 3

This works because the overtime line on your pay stub includes both the regular rate (2/3 of the total) and the premium (1/3 of the total). By dividing by 3, you isolate just the premium portion.

Real-World Example

Let's use a realistic scenario based on current GS pay scales:

Federal Firefighter at Nellis AFB:

• Regular hourly rate: $30/hour
• Overtime rate: $45/hour (1.5x)
• Overtime hours worked in 2025: 400 hours
• Total overtime pay shown on W-2: $18,000

Calculation:

• Qualified overtime deduction: $18,000 ÷ 3 = $6,000
• This $6,000 represents the 0.5x premium ($15/hour × 400 hours)
• You'll deduct $6,000 from your taxable income when you file

Tax Savings:
If you're in the 22% federal tax bracket, this $6,000 deduction saves you approximately $1,320 in federal taxes.

Breaking Down the Math

Why does dividing by 3 work? Let's look at the components of that $18,000 overtime payment:

• Regular rate portion: $30/hour × 400 hours = $12,000 (2/3 of overtime pay)
• Premium portion: $15/hour × 400 hours = $6,000 (1/3 of overtime pay)
• Total overtime pay: $18,000

The $6,000 premium is exactly one-third of the total overtime line item. This is the amount that qualifies for the tax deduction.

Important Limitations

Before you get too excited, remember these key restrictions from the OBBBA:

1. Maximum deduction: $12,500 per person ($25,000 if married filing jointly)
2. Income phase-out: Begins at $150,000 MAGI for single filers ($300,000 for joint filers)
3. FLSA-eligible only: You must be non-exempt under FLSA (most firefighters qualify)
4. Must file jointly: If you're married, you must file a joint return to claim the deduction
5. Requires SSN: Must include your social security number on the return
6. Temporary: Only applies to tax years 2025-2028 unless Congress extends it

Documentation Requirements for 2025

Since employers aren't required to break out overtime separately on 2025 W-2s, you'll need to maintain your own records:

• Keep all pay stubs showing overtime earnings throughout 2025
• Track your overtime hours in case you need to substantiate your calculation
• Request W-2 Box 14 information if your employer voluntarily reports qualified overtime there
• Save your worksheets showing how you calculated the deduction

The IRS specifically states in Notice 25-69 that you must "maintain adequate books and records to substantiate both their eligibility for and the amount of any deduction claimed."

What About 2026 and Beyond?

The good news: starting with 2026 tax returns, employers will be required to separately report qualified overtime compensation on Form W-2. This means you won't need to do the calculation yourself—it will be clearly labeled on your W-2.

For 2025, we're in a transition year where the IRS is providing flexibility with "reasonable methods" for calculating the deduction.

Special Situations

If Your Employer Reports in Box 14:

Some employers may voluntarily report your qualified overtime in Box 14 of your 2025 W-2. If yours does, you can use that amount directly instead of dividing by 3.

If You're Paid Double-Time:

If you earn overtime at 2x your regular rate (less common but possible), the calculation changes. You'd divide your total overtime by 4 to get the premium portion. The IRS provides guidance for this scenario in Example 4 of Notice 25-69.

If You Work Multiple Agencies:

You can use different calculation methods for each employer if you had multiple federal firefighting positions during 2025.

Action Steps for Federal Firefighters

1. Review your 2025 pay stubs to identify total overtime pay
2. Calculate your estimated deduction using the divide-by-3 method
3. Verify you meet all eligibility requirements (FLSA status, income limits, filing status)
4. Organize your documentation in case of IRS questions
5. Consult with a tax professional who understands federal employee benefits, especially if your situation is complex

The Bigger Picture

This overtime deduction represents a meaningful tax break for federal firefighters who regularly work extended hours. According to the IAFF, most firefighters work more than 53 hours per week and will benefit from this provision.

However, it's temporary legislation set to expire after 2028. If you're planning your finances, don't assume this deduction will be available indefinitely. There's ongoing legislative effort to expand and extend these provisions, but nothing is certain until Congress acts.

Final Thoughts

The IRS guidance in Notice 25-69 confirms what we suspected: only the premium portion of overtime qualifies for the deduction, and for most federal firefighters, that's calculated by dividing your overtime pay by 3. It's a simple calculation that could put over $1,000 back in your pocket.

This is exactly the kind of tax provision that makes professional guidance valuable. Federal firefighters already navigate complex benefits including TSP, FERS pensions, special retirement supplements, and now targeted tax deductions. Having a financial advisor who specializes in federal employees can help you maximize these benefits while avoiding costly mistakes.