Comp Time Payout and No Tax on Overtime (29 USC 207(o))

Comp time payout and no tax on overtime

If you are a state or local government employee who accrues compensatory time off instead of cash overtime, your payout counts as qualified overtime compensation only when you are paid for it, either when you take the day off and it is paid as wages or when unused hours are cashed out at termination, never when you earn it. When the employer credits one and one-half hours of comp time for each FLSA overtime hour, as in the IRS examples, the qualified amount is one-third of the comp time wages. IRS Notice 2025-69 shows this rule in Example 6 for tax year 2025, where $4,500 of wages gives $1,500. IRS FS-2026-13, question 18, added on August 6, 2026, uses the same rule. This page gives you a working estimator for that amount, shows which employers 207(o) applies to, and explains what the payout means for the no-tax-on-overtime deduction.

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Estimate the qualified amount of a comp time payout

FS-2026-13 Q18: qualified overtime compensation for a 207(o) comp time payout is the sum of (hours used and paid as wages × the rate under 207(o)(3)(B)) / 3, plus (hours cashed out at termination × the rate under 207(o)(4)) / 3. This estimator computes the qualified overtime compensation amount, not the deduction. It does not decide whether your comp time arrangement qualifies.

Use it only for comp time that your employer gives for overtime that the FLSA requires, at exactly one and one-half hours of comp time for each overtime hour, as in the IRS examples. If your employer gives comp time at a different rate, or for hours that the FLSA does not require, ask your payroll office for the qualified amount.

Comp time hours used and paid as wages in the tax year

Hours of accrued 207(o) comp time you took off (for example a day off) that your employer paid as wages during the tax year. That is the 207(o)(3)(B) bucket.

Comp time hours cashed out at termination

Hours of accrued 207(o) comp time your employer paid out as wages when your employment ended in the tax year. That is the 207(o)(4) bucket.

Your regular rate for these hours

Use the rate that 29 USC 207(o) sets for these hours. For hours used and paid as wages, 207(o)(3)(B) uses the regular rate that you earn when you receive the payment. For hours cashed out at termination, 207(o)(4) uses the higher of your average regular rate for your last 3 years of employment or your final regular rate. If the two rates are different, run the estimator once for each bucket and add the two results. Use a period for cents, for example 28.50.

Schedule 1-A MAGI

Optional. This estimator does not use MAGI. The qualified amount below is not the deduction. The deduction also applies a cap and a MAGI phaseout on Schedule 1-A.

Section 207(o) applies only to employees of a state, a political subdivision of a state, or an interstate governmental agency. It does not apply to private-sector or federal employees.

When comp time counts as paid

The IRS applies the same principles that govern income tax withholding to decide when a comp time payout is qualified overtime compensation. For employees who receive compensatory time off under 29 USC § 207(o), qualified overtime compensation is paid when you are paid wages for accrued compensatory time taken during the course of employment (for example a day off) or when accrued compensatory time is paid out upon termination of employment. Qualified overtime compensation is not paid when you earn the compensatory time off. Source: IRS FS-2026-13, question 18.

That timing matters for the deduction because the payout lands in a specific tax year. Comp time earned in 2025 but used as a paid day off in 2026 produces qualified overtime compensation in 2026, the year you were paid. For tax years 2026 to 2028 the employer must report it in box 12 code TT of your Form W-2 for that year before it can be deducted. See what box 12 code TT must contain and what to do if the employer did not report it.

Does 207(o) apply to your employer?

State or local government employee. For these employers yes. If you accrue compensatory time off in lieu of cash overtime under 29 USC § 207(o), the timing rule and the divide-by-three computation on this page apply (FS-2026-13, question 18).
Private-sector employee. For these workers no. Section 207(o) does not apply to private employees. Private employers generally pay overtime as cash, which is covered by the ordinary qualified overtime compensation rules; see what qualifies (FS-2026-13, question 18 note).
Federal employee. For federal employees no. Section 207(o) does not apply to federal employees; FS-2026-13 covers federal employee issues separately in Topic G (question 18 note).

Worked examples of the computation

FS-2026-13 Q18 describes two example situations, both of an FLSA overtime-eligible state or local government employee whose employer grants one and one-half hours of compensatory time for each overtime hour worked. The IRS examples describe the computation procedure only. They give no hours, rates or dollar amounts. For example, 12 hours of comp time used and paid at a regular rate of $30.00 give wages of $360.00 and a qualified amount of $120.00. These figures are an illustration from this page, not IRS figures.

Comp time payout examples (computation per FS-2026-13 Q18)
Scenario	Computation
Individual A: used accrued comp time as a paid day off during employment	(hours used and paid as wages × the rate under 207(o)(3)(B)) ÷ 3
Individual B: terminated and was paid for unused accrued comp time	(hours cashed out × the rate under 207(o)(4)) ÷ 3

In both examples the employer determines the hours of comp time paid as wages, multiplies them by the applicable rate, and divides by three. The estimator above uses one rate. If the 207(o)(3)(B) rate and the 207(o)(4) rate are different, run the estimator once for each bucket and add the two results.

From payout to deduction

The amount this tool computes is the qualified overtime compensation the employer paid. It is the starting point for the deduction, not the deduction itself. To claim it you complete Schedule 1-A, which applies the annual cap (up to $25,000 joint, $12,500 otherwise, per FS-2026-13, question 2) and reduces the deduction by $100 for each complete $1,000 of MAGI above the threshold, using the income limit rules. You need a social security number that is valid for employment. If you are married, you must file a joint return to claim the deduction (FS-2026-13, questions 24 and 25). For tax years 2026 to 2028 the employer must report the amount in box 12 code TT; if the comp time payout is missing from your W-2, see how to request a correction.

How this page was checked

Each rule on this page was compared with IRS Fact Sheet FS-2026-13 (August 2026), question 18, added August 6, 2026, and with the text of 29 USC 207(o) at govinfo. The $100 for each complete $1,000 phaseout step was compared with Part III of the 2025 Schedule 1-A. The employment tax note was compared with IRS Publication 963. The estimator applies the cited Q18 rule in code. The IRS examples in Q18 give no hours, rates or dollar amounts. The only IRS example figures on this page, $4,500 of wages and $1,500, come from Example 6 of IRS Notice 2025-69. No number on this page comes from dol.gov or eCFR. Rules checked October 20, 2026. The methodology page explains how the site handles sources.