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The conversation surrounding the cessation of taxes on overtime pay at the federal level has ignited a significant national dialogue. Workers who engage in overtime are compensated at a rate of 1.5 times their standard hourly wage for hours exceeding 40 in a week. However, the implications of tax-free overtime have led to debates about whether such measures will benefit workers or exacerbate the federal deficit, as well as whether it might encourage employers to extend hours rather than hiring additional staff.
As this issue unfolds, various states are weighing in on the question of overtime taxation. While some states align with the federal initiative to eliminate taxes on overtime pay, others may choose to uphold taxation on this income. Notably, there are states that do not impose income taxes at all, effectively excluding overtime pay from taxation. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
State-Level Developments on Overtime Taxation
Several states have initiated proposals addressing the taxation of overtime wages, and here’s an overview of the current legislative landscape:
Connecticut’s Overtime Tax Initiative
Lawmakers in Connecticut are actively pursuing legislation to exempt overtime income from state taxes. Proposed bills, SB 651 and HB 5024, would aim to exempt overtime wages for employees. Given the substantial amount of $305.4 million paid in overtime to state employees in recent years, the successful passage of these bills could significantly impact many Connecticut workers, although no enactment dates have been established yet.
Georgia’s Proposal to Exempt Overtime Tax
In Georgia, there is active consideration of HB 375, which seeks to exempt overtime earnings from state tax for full-time hourly employees. If the bill passes, it could take effect as early as January 1, 2026, and is currently under review in the House.
Illinois Overtime Tax Legislation
Illinois is home to four active proposals aimed at eliminating the tax on overtime pay. Bills such as SB 174 and HB 2734 propose to deduct overtime wages from taxable income, while HB 1899 and HB 1750 introduce further deductions for overtime compensation and gratuities, respectively. These bills are currently undergoing review in their legislative chambers.
Iowa’s Overtime Tax Conversation
Iowa House Democrats are not only advocating for the elimination of taxes on overtime pay but also on cash tips. Proposed legislation would exempt both forms of compensation from state taxes, with potential enactment by January 1, 2026. A separate Republican-led proposal on overtime pay is also under consideration but has seen limited progress.
Kentucky’s Recent Tax Proposal
In Kentucky, recent tax reforms include a bill to exempt overtime pay from taxes, outlined in HB 26. If enacted, the proposal would also require employers to report overtime and tips separately on employee W-2s. This could take effect on January 1, 2026.
Massachusetts Overtime Tax Status
Massachusetts representatives are proposing legislation that may exempt overtime wages from the state’s income taxes through HB 3173. This focus on overtime taxation may provide additional financial relief to hourly workers, though it currently targets only hourly positions and lacks a defined enactment timeline.
Michigan’s Overtime Tax Proposal
Legislators in Michigan are discussing SB 125, which would eliminate the state tax on overtime. Given recent increases in minimum wage for both tipped and non-tipped workers, exempting overtime compensation could offer an additional economic benefit in the coming years.
Minnesota’s Overtime Tax Initiatives
Senate Republicans in Minnesota are pushing for a comprehensive tax exemption for overtime pay through legislation that would potentially affect various forms of employee compensation. If successful, this law could take effect as early as January 1, 2025.
Missouri Overtime Tax Legislation
In Missouri, HB 860 aims to eliminate taxes on both overtime pay and tips. While two previous attempts to introduce similar legislation were unsuccessful due to fiscal concerns, this current proposal seeks to relaunch the discussion in the state legislature.
Nebraska’s Overtime Tax Bills
Nebraska is currently evaluating two bills, LB 28 and LB 30, that propose exemptions on overtime pay and tip income. If enacted, they could significantly change the tax obligations for many workers starting in 2025.
New Jersey’s Overtime Tax Exemption Proposal
In New Jersey, efforts are underway to exempt overtime pay from state taxes with bill A2621. This legislation could provide crucial relief in a state known for high taxes, assisting residents in managing their financial burdens better.
New York’s Overtime Tax Considerations
New York is also addressing the overtime tax issue with two separate bills: SB 3914, which aims to eliminate taxes on overtime pay, and SB 587, which seeks to remove taxation on cash tips. These measures could provide significant tax relief for New York workers.
North Carolina’s Overtime Tax Bill
North Carolina is considering HB 11, a comprehensive tax proposal that includes provisions to exempt overtime pay from income taxes along with exemptions for tips and bonuses up to $2,500. This bill is currently under review in the House Finance Committee.
Ohio’s Proposal to Eliminate Overtime Taxes
Ohio legislators are assessing HB 39, which seeks to eliminate state taxes on overtime wages. If adopted, this could take effect by January 1, 2026, significantly altering the tax landscape for workers in the state.
Oregon’s Overtime Tax Proposals
Oregon is debating the potential elimination of overtime taxes through HB 2234. This bill would propose no state tax on overtime pay, alongside efforts to exempt tips for hospitality industry employees, with both measures aiming for a mid-2026 implementation.
South Carolina’s Overtime Tax Legislation
In South Carolina, legislators are exploring multiple initiatives to exempt overtime pay from state taxes through bills like HB 3793, as well as other related proposals aimed at providing comprehensive tax relief to workers. These bills could be enacted immediately, pending further legislative actions.
States with No Overtime Tax
Alabama has established a temporary exemption for overtime pay, set to expire on June 30, 2025. Efforts are underway to secure a permanent extension of this exemption amid discussions about other tax reforms.
Mississippi and Virginia’s Rejection of Overtime Tax Exemptions
Conversely, states like Mississippi and Virginia have opted not to pursue tax-free overtime measures. In Mississippi, HB 504 was dismissed in committee, while Virginia’s HB 1965 also failed to pass in the General Assembly largely due to budgetary constraints.
As state legislatures continue their sessions, the fate of bills related to overtime taxation remains uncertain. The outcome of these proposals could have significant ramifications for workers across states as the national debate takes shape.
Source
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