diff --git a/payload_generator/deflate_utils.cc b/payload_generator/deflate_utils.cc
index ef8d257..8db67ce 100644
--- a/payload_generator/deflate_utils.cc
+++ b/payload_generator/deflate_utils.cc
@@ -296,7 +296,7 @@
       }
     }
 
-    if (extract_deflates) {
+    if (extract_deflates && !file.is_compressed) {
       // Search for deflates if the file is in zip or gzip format.
       // .zvoice files may eventually move out of rootfs. If that happens,
       // remove ".zvoice" (crbug.com/782918).
diff --git a/payload_generator/filesystem_interface.h b/payload_generator/filesystem_interface.h
index d04295c..05d387f 100644
--- a/payload_generator/filesystem_interface.h
+++ b/payload_generator/filesystem_interface.h
@@ -62,6 +62,13 @@
     // indicating the starting block, and the number of consecutive blocks.
     std::vector<Extent> extents;
 
+    // If true, the file is already compressed on the disk, so we don't need to
+    // parse it again for deflates. For example, image .gz files inside a
+    // compressed SquashFS image. They might have already been compressed by the
+    // mksquashfs, so we can't really parse the file and look for deflate
+    // compressed parts anymore.
+    bool is_compressed = false;
+
     // All the deflate locations in the file. These locations are not relative
     // to the extents. They are relative to the file system itself.
     std::vector<puffin::BitExtent> deflates;
diff --git a/payload_generator/squashfs_filesystem.cc b/payload_generator/squashfs_filesystem.cc
index 9838794..234a587 100644
--- a/payload_generator/squashfs_filesystem.cc
+++ b/payload_generator/squashfs_filesystem.cc
@@ -166,6 +166,7 @@
     uint64_t start;
     TEST_AND_RETURN_FALSE(base::StringToUint64(splits[1], &start));
     uint64_t cur_offset = start;
+    bool is_compressed = false;
     for (size_t i = 2; i < splits.size(); ++i) {
       uint64_t blk_size;
       TEST_AND_RETURN_FALSE(base::StringToUint64(splits[i], &blk_size));
@@ -173,10 +174,11 @@
       auto new_blk_size = blk_size & ~kSquashfsCompressedBit;
       TEST_AND_RETURN_FALSE(new_blk_size <= header.block_size);
       if (new_blk_size > 0 && !(blk_size & kSquashfsCompressedBit)) {
-        // Compressed block
+        // It is a compressed block.
         if (is_zlib && extract_deflates) {
           zlib_blks.emplace_back(cur_offset, new_blk_size);
         }
+        is_compressed = true;
       }
       cur_offset += new_blk_size;
     }
@@ -186,6 +188,7 @@
       File file;
       file.name = splits[0].as_string();
       file.extents = {ExtentForBytes(kBlockSize, start, cur_offset - start)};
+      file.is_compressed = is_compressed;
       files_.emplace_back(file);
     }
   }