A growing number of legislative proposals and state-level discussions in 2026 have focused on reducing or eliminating income taxes on overtime pay. While no universal federal exemption has been enacted, workers and employers need to understand what proposals exist, how any overtime tax deduction works in practice, and how overtime wages are currently reported on W-2 forms.
What "No Tax on Overtime" Means
The phrase "no tax on overtime" refers to proposals that would exempt overtime wages — pay earned for hours worked beyond 40 per week at the required 1.5× rate — from federal and/or state income taxation. These proposals would not eliminate payroll taxes (Social Security and Medicare), which would still apply to overtime pay under current law.
Federal Proposals in 2026
Several bills have been introduced in Congress to create an overtime pay deduction or exclusion from gross income. Key features of the most prominent 2026 proposals include:
- Deduction vs. exclusion: Most proposals create an above-the-line deduction (available whether or not you itemize) rather than a true income exclusion. This means overtime pay would still appear on your W-2 but could be deducted on your Form 1040.
- Earnings cap: Proposals typically phase out or cap the benefit for higher-income workers. Common thresholds range from $75,000 to $150,000 in annual income.
- Definition of "overtime pay": Most proposals define qualifying overtime as pay received for FLSA-covered overtime hours (hours over 40 per workweek at 1.5× or higher) — not shift differentials or bonuses.
- FICA still applies: Social Security (6.2%) and Medicare (1.45%) taxes would still be withheld on overtime pay under all current proposals.
State-Level Overtime Tax Relief
Several states have moved ahead of federal action:
- Alabama: Enacted an overtime pay exemption from state income tax for hourly workers in manufacturing, mining, and several other industries.
- Georgia: Passed legislation exempting overtime wages from state income tax for certain manufacturing workers.
- Other states: Legislative proposals are pending in Florida, South Carolina, and Tennessee as of 2026.
State exemptions vary significantly — some apply only to specific industries, some have earnings caps, and some are temporary. Check your state's Department of Revenue for current rules.
How Overtime Pay Is Currently Taxed
Until any federal exemption is enacted, overtime pay is taxed exactly like regular wages:
- Subject to federal income tax withholding (based on your W-4 elections)
- Subject to Social Security tax (6.2% up to the annual wage base)
- Subject to Medicare tax (1.45%, plus 0.9% additional Medicare tax if wages exceed $200,000 single / $250,000 married)
- Subject to state and local income tax where applicable
Because overtime pay increases your total income for the pay period, it may temporarily push you into a higher withholding bracket for that paycheck — but your actual marginal tax rate for the year is determined by your total annual income, not any single pay period.
Overtime Pay on Your W-2
Your employer does not separately itemize overtime pay on your W-2 form. All wages — regular, overtime, and double-time — are combined in Box 1 (Wages, tips, other compensation). There is no separate W-2 box for overtime pay.
If a federal overtime deduction is enacted, the expected implementation would be:
- Your employer continues to include all wages (including overtime) in W-2 Box 1
- You calculate your qualifying overtime wages separately (from pay stubs)
- You claim the deduction on Schedule 1, Line 24 (or wherever designated) of Form 1040
What Workers Should Track Now
Even if no federal exemption is in place yet, workers should track their overtime pay carefully in case legislation passes retroactively or for state deductions that are already available:
- Save all pay stubs showing overtime hours and overtime pay amounts
- Note the pay periods in which overtime was earned
- Keep your own running total of overtime wages for the year
- Ask your payroll department if they can provide a year-end overtime pay summary
How to Estimate Your Potential Tax Savings
If a "no tax on overtime" deduction applies to you, your savings depend on your marginal federal tax rate:
| Marginal Rate | Tax Saved per $1,000 OT Pay |
|---|---|
| 22% | $220 |
| 24% | $240 |
| 32% | $320 |
| 35% | $350 |
Use our overtime calculator to estimate your gross overtime pay, then apply your marginal rate to estimate potential savings.
Key Takeaways for 2026
- No universal federal "no tax on overtime" law is currently in effect as of mid-2026 — proposals are pending
- Some states (Alabama, Georgia) have already enacted state-level overtime tax relief
- Payroll taxes (FICA) would still apply to overtime pay even under most proposals
- Track your overtime pay stubs carefully — you may need them to claim any deduction
- Consult a tax professional for guidance specific to your situation
This article is for informational purposes only and does not constitute tax or legal advice. Tax laws change frequently — consult a qualified tax professional for guidance on your specific situation.