The OBBBA created a federal income tax deduction — not an exemption — of up to $12,500 (single) or $25,000 (MFJ) on FLSA overtime premium pay for 2025–2028. FICA taxes still apply to all overtime. Nine states have no income tax (TX, FL, NV, etc.) so overtime is already state-tax-free. Michigan and Arizona have enacted matching state deductions and Georgia a $1,750 exclusion; California, New York, and Illinois have no state deduction.
At a glance
Key Facts
Federal OT Deduction (2026)
Up to $12,500 (single) / $25,000 (MFJ) of overtime premium — OBBBA, deducted from federal taxable income
Deduction Type
Schedule 1-A deduction — reduces taxable income, not AGI
FICA Still Owed
Social Security (6.2%) + Medicare (1.45%) apply to ALL overtime pay — no exception
What Qualifies
FLSA overtime premium only — the extra 0.5× rate for hours over 40/week for non-exempt employees
Phase-Out
Reduced by $100 per $1,000 of modified AGI above $150,000 (single) / $300,000 (MFJ)
Michigan and Arizona enacted matching deductions and Georgia a $1,750 exclusion; CA, NY, IL have no state deduction — state tax still applies to overtime
Sunset Date
Expires December 31, 2028 — temporary provision, applies to tax years 2025–2028
Introduction
No Tax on Overtime 2026: What the OBBBA Actually Does (and Doesn't Do)
The One Big Beautiful Bill Act (OBBBA, P.L. 119-21) introduced a federal income tax deduction of up to $12,500 (single) or $25,000 (married filing jointly) on qualifying overtime premium pay for tax years 2025–2028. That word "deduction" matters: it is not an exemption, not a credit, and it does not eliminate FICA taxes (Social Security and Medicare) on overtime.
Whether you also save on state income tax depends entirely on your state. Nine states already have no state income tax, making overtime state-tax-free regardless. Michigan, Arizona and Georgia have enacted their own overtime deductions (Georgia's is capped at $1,750). But large states including California, New York, and Illinois have no state deduction — workers there still owe state income tax on all overtime earnings.
This guide explains how the deduction works, which overtime qualifies under FLSA, the full state conformity picture, and the biggest misconception: that the deduction eliminates FICA. Use our No Tax on Overtime Calculator for a real-time federal and state breakdown.
Section 01
How the Federal No Tax on Overtime Deduction Works
The OBBBA created a federal income tax deduction (claimed on Schedule 1-A) for overtime premium pay. Here is the exact mechanism:
The Deduction Caps
Single filers: up to $12,500 of qualifying overtime premium pay deducted from federal taxable income
Married filing jointly: up to $25,000 of qualifying overtime premium pay deducted from federal taxable income
It reduces your taxable income (not your AGI) — you do not need to itemize to claim it. It stacks with the standard deduction.
What the Deduction Does NOT Cover
FICA taxes: Social Security (6.2%) and Medicare (1.45%) still apply to every dollar of overtime pay. FICA is a payroll tax separate from income tax — the OBBBA has no effect on it.
State income taxes: Only a handful of states have their own overtime deduction. Most state income taxes on overtime are unaffected.
The regular wage portion of overtime: Only the premium (the extra 0.5× rate) is deductible, not your full overtime wages.
Phase-Out: Higher Earners Get Less
The deduction is reduced when your modified AGI exceeds:
Single: Phase-out begins at $150,000 MAGI
Married filing jointly: Phase-out begins at $300,000 MAGI
The reduction is $100 for each $1,000 of MAGI above the threshold, so a full $12,500 deduction is gone at $275,000 (single) and a full $25,000 deduction at $550,000 (joint).
Sunset: This Is Temporary
The overtime deduction expires after December 31, 2028. It covers tax years 2025–2028 only. Congress would need to act to extend or make it permanent. Plan accordingly if you are relying on this for multi-year financial decisions.
Which States Conform to the Federal Overtime Deduction?
State conformity for the overtime deduction is more limited and more recent than for the tips deduction. Each state independently decides whether to adopt the federal OBBBA overtime provisions. The landscape as of June 2026:
No State Income Tax — 9 States (Overtime Already State-Tax-Free)
Workers in these nine states already paid zero state tax on wages, including overtime, before the OBBBA. The federal deduction applies to their federal bill, but there is no state income tax layer to reduce:
Alaska — no state income tax
Florida — no state income tax
Nevada — no state income tax
New Hampshire — no tax on earned income
South Dakota — no state income tax
Tennessee — no tax on earned income
Texas — no state income tax
Washington (state) — no state income tax
Wyoming — no state income tax
States That Have Conformed
Michigan — Michigan's 2025 PA 24 created a state deduction equal to the federal qualified overtime compensation deduction for tax years 2026 through 2028 (not 2025); a matching deduction exists for tips
Arizona — HB 4168 (signed June 13, 2026) creates an Arizona subtraction mirroring the federal overtime deduction for taxable years beginning from and after December 31, 2024; see No Tax on Overtime Arizona 2026
Georgia — HB 463 excludes up to $1,750 of qualified overtime compensation for full-time hourly employees for tax years 2026 through 2028 (and up to $1,750 of cash tips); see No Tax on Overtime Georgia 2026
States that start from federal taxable income may pick up the deduction automatically, while states that start from federal AGI (the federal deduction is taken below AGI) need their own subtraction — check your state revenue department for guidance.
States Without an Overtime Deduction (as of June 2026)
These states still tax all overtime income at normal state rates, even though the federal deduction applies:
California — does not conform; overtime subject to CA income tax (1%–13.3%); also note California has daily overtime rules that do not qualify for the federal deduction anyway
New York — no overtime subtraction (the FY 2027 budget, S.9009-C Part B, added a subtraction for tips only, Tax Law §612(c)(48)); overtime taxed at NY rates (3.9%–10.9% on the 2026 schedule); NYC residents pay additional city income tax
Illinois — no overtime deduction; flat 4.95% state rate applies to all overtime
New Jersey — the Division of Taxation says the federal overtime, tips and senior deductions do not affect the New Jersey return (page updated December 1, 2025)
North Carolina — the Department of Revenue's FAQ dated September 11, 2026 says the federal overtime deduction cannot be taken on the 2025 North Carolina return because the General Assembly did not enact a state deduction
Connecticut — the 2025 CT-1040 instructions list no overtime or tips subtraction from federal AGI
Hawaii — Department of Taxation Announcement 2026-06 (July 31, 2026): Act 35 does not conform to IRC §225 (overtime), although it does conform to §224 (tips) for tax years beginning after December 31, 2025
Colorado — the General Assembly's summary of HB25B-1020 (which was lost) describes current law as requiring an add-back of the federal overtime deduction for tax years beginning January 1, 2026 and later
Washington D.C. — unsettled: the Council decoupled from the federal overtime and tips deductions in December 2025 legislation that Congress disapproved in February 2026, and the Council's July 2026 Budget Support Act was reported (National Taxpayers Union Foundation, July 15, 2026) to allow DC deductions for tips and overtime for tax years 2026 to 2028; confirm with the DC Office of Tax and Revenue
Important caveat: State conformity is evolving. This information reflects available guidance as of June 2026 (September 2026 for the states with dated official sources named above), and the list of states is not exhaustive — not every state has been checked against its own revenue department. State legislatures may act at any time. Always verify your state's current position with your state's Department of Revenue before filing. Sources: Bipartisan Policy Center — No Tax on Overtime 2026; Thomson Reuters — State Decoupling from Federal Tax Provisions.
Section 03
What Qualifies as FLSA Overtime?
The federal deduction applies exclusively to overtime that qualifies under the Fair Labor Standards Act (FLSA). Not all overtime — and not all "time-and-a-half" pay — is FLSA overtime.
The FLSA Overtime Definition
Under the FLSA, covered, non-exempt employees must receive overtime pay at 1.5 times their regular rate for all hours worked beyond 40 hours in a single workweek. The deductible amount is the premium — the extra 0.5× portion — not the full overtime wages.
Example: You earn $30/hour and work 50 hours in a week (10 hours overtime).
Qualifying premium: $30 × 0.5 × 10 = $150 deductible
Who Is Covered Under FLSA
Most hourly workers and many salaried employees earning below the FLSA exempt salary threshold are covered. Common covered occupations include: manufacturing and warehouse workers, retail and service employees, nurses and healthcare staff (hourly), construction and trades workers, truck drivers and delivery workers, and restaurant and hospitality workers.
FLSA-Exempt Employees — Do NOT Qualify
Employees classified as "exempt" under the FLSA are not entitled to overtime under federal law and therefore cannot claim the deduction. Exempt categories include:
Executive, administrative, and professional employees earning above the FLSA salary threshold
Outside sales employees
Certain computer employees above the pay threshold
Highly compensated employees
If you are salaried and receive extra pay for longer hours, but are classified as FLSA-exempt, that pay does not qualify for the deduction.
California Daily Overtime — A Critical Distinction
California state law requires overtime for hours worked beyond 8 in a single day, even if the employee works fewer than 40 hours total in the week. This California-specific daily overtime does NOT qualify for the federal OBBBA deduction — only FLSA weekly overtime (over 40 hours/week) qualifies. A California worker who earns daily overtime but does not exceed 40 hours weekly cannot claim the federal deduction on those hours.
California and New York: State Still Taxes Your Overtime
California and New York are the two largest states by workforce and they present a compounded disadvantage for overtime workers under the OBBBA framework.
California
California has explicitly not conformed to the OBBBA overtime deduction. Every dollar of overtime premium pay remains subject to California income tax at rates from 1% to 13.3%, depending on total income. On top of this, California's daily overtime rules mean that some overtime earned by California workers does not even qualify for the federal deduction — they only get the federal benefit on FLSA weekly overtime (over 40/week), not on California-required daily overtime hours.
Example: Registered nurse, $42/hour, $15,000 in FLSA qualifying overtime premium in 2026, total income $95,000, single:
Federal OBBBA deduction: $12,500 (cap for single filers)
Federal income tax savings (at ~22% marginal rate): approximately $2,750
California state tax on $15,000 overtime premium (non-conforming, ~9.3% marginal rate): approximately $1,395 owed to state
Net benefit vs a Texas nurse: the California nurse saves $2,750 federally but still pays ~$1,395 in state tax
The federal savings are real and meaningful — but California workers do not capture the additional state-level benefit that conforming-state workers get.
New York
New York has not conformed to the OBBBA overtime deduction. Overtime income remains fully taxable at New York state rates (3.9%–10.9% on the 2026 schedule), plus New York City income tax (3.078%–3.876%) for NYC residents. A New York City worker whose taxable income is in the 5.4% state bracket ($13,900–$80,650) and the top NYC rate (3.876%) pays about 9.3% combined state and city income tax on overtime premium income that would be federally deductible (about 9.8% in the 5.9% bracket).
The bottom line for CA and NY workers: You still receive the full federal OBBBA overtime deduction on your federal return. You simply do not get any state-level reduction. Use the No Tax on Overtime Calculator — select California or New York and it calculates both the federal saving and the remaining state tax liability.
Section 05
FICA Still Applies to Overtime Pay — Always
This is the most common misconception about the OBBBA overtime deduction, and it costs workers money when they under-withhold or misplan their tax situation.
What FICA Is
FICA (Federal Insurance Contributions Act) encompasses two payroll taxes:
Social Security tax: 6.2% on wages up to the annual wage base ($184,500 in 2026)
Medicare tax: 1.45% on all wages, no cap
Additional Medicare Tax: 0.9% on wages exceeding $200,000 (single) or $250,000 (MFJ) — not reduced by OBBBA
FICA is a payroll tax, not an income tax. The OBBBA only modified the federal income tax code. It has no effect whatsoever on FICA.
Worked Example: What You Actually Pay on $10,000 of Overtime Premium
Assume you are a single filer, $50,000 base income, $10,000 in qualifying FLSA overtime premium, in a state with no income tax (Texas):
FICA on overtime premium: $10,000 × 7.65% = $765 owed (Social Security + Medicare, employee share)
Federal income tax on overtime premium WITHOUT deduction: $10,000 at the 12% marginal rate (taxable income stays under $50,400) = $1,200
Federal income tax on overtime premium WITH OBBBA deduction: $0 (full $10,000 deducted, within the $12,500 cap)
State income tax (Texas): $0
Total tax on overtime premium: $765 (FICA only)
Effective tax rate on overtime premium: 7.65% (down from ~19.65% without OBBBA)
The savings are substantial — but FICA is not going away. Your employer also pays a matching 7.65% FICA on your overtime wages. Total FICA on the overtime premium is 15.3% (combined employer and employee share).
Why This Matters for Withholding
Your paycheck withholding should still reflect FICA deductions on all overtime hours. If you see FICA disappearing from your overtime pay stubs, that is an error — contact your payroll department. The federal income tax withholding may be adjusted to reflect the deduction, but FICA must remain.
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Nine states have no state income tax at all, making overtime already state-tax-free: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. For the OBBBA federal overtime deduction at the state level, Michigan and Arizona have enacted matching deductions and Georgia a $1,750 exclusion. Most other states — including California, New York, and Illinois — have no state deduction and still tax overtime income at normal state rates. The federal OBBBA deduction applies to all workers regardless of state.
Q
Does the overtime deduction apply to FICA taxes?
No. The OBBBA overtime deduction is an income tax deduction only. Social Security (6.2%) and Medicare (1.45%) taxes still apply to all overtime pay regardless of the deduction. FICA is a separate payroll tax — the OBBBA did not change it. This is the most important misconception about the law: even if your federal income tax on overtime drops to zero, you still owe FICA on every overtime dollar.
Q
How much overtime pay can I deduct?
Single filers can deduct up to $12,500; married filing jointly can deduct up to $25,000. The deduction applies only to the FLSA overtime premium — the extra 0.5× hourly rate for hours over 40 per week — not your full overtime wages. The deduction is also reduced by $100 for each $1,000 of modified AGI above $150,000 (single) or $300,000 (MFJ). It applies to tax years 2025–2028 and expires December 31, 2028.
Q
Does California have no tax on overtime?
No. California has not conformed to the federal OBBBA overtime deduction. All overtime pay remains subject to California income tax at rates from 1% to 13.3%. Additionally, California's daily overtime rules (over 8 hours/day) do not qualify for the federal deduction — only FLSA weekly overtime (over 40 hours/week) is eligible. California workers still receive the full federal OBBBA deduction on their federal return; they simply do not get a state-level benefit.
Q
What is FLSA overtime and how does it qualify?
FLSA overtime is pay at 1.5 times the regular rate for hours worked beyond 40 in a single workweek, required under the Fair Labor Standards Act for covered non-exempt employees. For the OBBBA deduction, only the premium portion (the extra 0.5×) is deductible — not the full overtime wages. Exempt salaried employees, self-employed workers, and independent contractors do not qualify. California's daily overtime (over 8 hours/day) does not qualify for the federal deduction.
Q
Does the overtime deduction expire?
Yes. The OBBBA overtime deduction is a temporary provision that expires after December 31, 2028. It applies to tax years 2025, 2026, 2027, and 2028. The last return on which you can claim it is your 2028 federal tax return, filed in spring 2029. Congress would need to pass new legislation to extend or make the deduction permanent after that date.
Disclaimer:This guide provides general information about the OBBBA no-tax-on-overtime deduction and state conformity as of June 2026. CRITICAL: FICA taxes (Social Security and Medicare) still apply to all overtime pay — the deduction reduces federal income tax only. This deduction is temporary and expires December 31, 2028. State conformity is evolving — verify your state's current position with your state Department of Revenue before filing. This does not constitute tax, legal, or financial advice. Consult a licensed tax professional for advice specific to your situation.