Imagine clocking out after a 55-hour work week. Your overtime pay remains untaxed by the state. This is a growing reality in a roster of states as of March 22, 2025. So, which states do not tax overtime? Alabama is leading the charge with its bold overtime tax exemption, cutting overtime pay taxation since January 1, 2024. Others are flirting with state-by-state no tax on overtime plans. These states with No Tax on Overtime are rewriting the rules of the game. For a growing number of Americans, it’s a golden opportunity to boost paychecks and save more.
Why tax exemption on overtime matters
Untaxed overtime is more than a simple perk. It comes as a lifeline for hourly workers who power the economy’s graveyard shifts. Alabama’s pioneering move has already shown a 5% increase in overtime volunteered. With federal overtime tax updates stalled for now, more and more states are stepping up with their overtime pay tax laws. Below is a list of states with no tax on overtime in 2025.
Alabama leads with an overtime tax exemption, and Georgia’s next. Full list of states with no tax on overtime pay laws here!
Alabama, the first state to go tax-free
Alabama started the no tax on overtime states trend with House Bill 217 (Act 2024-437), signed in 2023. Since January 1, 2024, hourly workers clocking over 40 hours a week have seen an increase in their wages. Set to expire June 30, 2025, this state overtime tax exemption has been a game-changer for the state’s frontline workers.
“I’ve picked up extra shifts without losing a massive chunk to taxes,” says mobile nurse Tammy Gaines. “It’s a 1,000 more a year for my family.”
Lawmakers in Alabama are on the fence about it’s future now. Will Alabama remain the poster child for no tax on overtime laws? Only time will tell.
Georgia on the cusp of tax exemption on overtime pay
A proposal on No Tax on Overtime in Georgia is gaining traction. The move is backed by employers facing labor shortages in a large number of sectors. This state’s aims to remove its 5.75% tax on overtime pay.
If passed, Georgia’s No Tax on Overtime bill could benefits thousands of workers in logistics and manufacturing industry.
“We’re watching Alabama’s playbook,” an HR manager at a Savannah warehouse tells me. “Untaxed overtime could keep our workers on the floor longer.”
With Georgia joining the list of states with No Tax on Overtime, it’s only a matter of time until taxation is changed in other states this year.
Texas on overtime tax exemption
Texas is the only state with no income tax as of 2025. It has sidestepped overtime pay taxation with its unique policy. While there’s no Texas overtime tax exemption to enact, the federal taxes still bite workers. The upcoming federal plan could amplify the Texas’s edge if it passes late 2025. For now, Texas workers enjoy a de factor state overtime tax exemption.
Local advocates are also pushing to champion a broader No Tax on Overtime in Texas. Could the lone star lead by example?
Kentucky’s overtime regulations in play
Kentucky’s HB 26, floated in 2024, pairs no tax on overtime with tip exemptions. It’s a bold bid to boost service and blue-collar workers. With a 4.5% state tax, removing overtime pay tax, the move could add $18 to a 10-hour overtime at $20/hour. It’s not law yet, but labor-short industries like healthcare are cheering.
“We need this yesterday,” a Louisville factory supervisor says. Kentucky’s state-by-state no tax on overtime status hangs on 2025’s legislative push.
New York on state overtime tax policies
New York’s S.3914 hints at a future with tax exemption on overtime. With a massive 6.85% tax for middle earners, exempting overtime could save workers $34.25 on a $500 overtime check. Could 2025 see overtime pay tax laws shift in New York?
List of states with tax exemption on overtime
Beyond Alabama’s lead and Georgia’s ambitious moves, several states are exploring overtime tax exemptions with varying degrees of commitment.
Illinois: Senate Bill 2981 plans for a small deduction rather than a full tax exemption on overtime pay starting in mid- or late-2025. This approach may shift responsibility to employees.
Michigan: Michigan’s no tax on overtime proposal remains nonexistent as of March 6, 2025. The state adheres to FLSA overtime rules and charges a flat 4.25% income tax. There’s no relief on overtime pay taxation in 2025.
New Jersey: Assembly Bill 2621 proposes a permanent tax exemption on overtime pay. It’s touted as a long-term vision with no sunset date as of March 23, 2025.
Ohio: When does no tax on overtime start in Ohio? With the state’s overtime rules tied to the FSLA and a state income tax topping at 3.75%, Ohio hasn’t yet shifted toward no tax on overtime laws by state.
Rhode Island: Senate Bill 2568 targets a provisional reprieve for 2025 and 2026, offering a test run for no tax on overtime laws by state.
South Carolina: House Bill 4811 is in the works, although its underdefined “overtime income” leaves room for plenty of changes.
West Virginia: This state’s no tax on overtime proposal is in limbo with little details emerging in 2025.
These state overtime pay tax regulations show a shift to rethink overtime tax exemption laws. Although, it’s not without hurdles as seen in Mississippi and Wisconsin when their efforts for no tax on overtime collapsed in April 2024.
Workers, HR, and Beyond
These states aren’t just doling out cash in 2025. They’ll reshape the world of work with their state-by-state No Tax on Overtime policies. Alabama has seen a productivity bump by 5% in 2024. But it’s not all rosy. Analysts warn of revenue dips in several states. Alabama’s bold move on tax exemption policy may cost $230 million if it remains permanent.
As for workers like Tammy, the math is simple. More money means more reasons to stay late.
What’s next for overtime taxation changes in 2025?
With Alabama’s pilot nearing its June 30 deadline, all eyes are on renewal talks. Georgia, Kentucky and New York could join the list of states with tax exemption on overtime pay in 2025. Federally, the pitch is still in limbo, it may soon pass, and state efforts might pay off in 2025.
Which states do not tax overtime in 2025?
As of March 22, 2025, Alabama is the only state fully exempting overtime pay from state income tax, effective since January 1, 2024. Texas, with no state income tax, indirectly qualifies but lacks a specific exemption.
When does Alabama’s overtime tax exemption end?
Alabama’s no-tax-on-overtime law runs through June 30, 2025, unless lawmakers extend it.
Is there a federal no tax on overtime law?
Not yet. The current administration proposed it for 2025, but it’s stalled in Congress. States are driving overtime pay tax laws for now.
Which states are considering no tax on overtime?
Georgia, Kentucky (HB 26), and New York (S.3914) are proposing overtime tax exemptions, with Georgia closest to action in 2025.
How does no tax on overtime affect my paycheck?
In Alabama, a 5% tax cut on overtime means $25 more per $500 earned. Savings vary by state tax rates, check your local overtime pay taxation rules.
Why don’t all states exempt overtime taxes?
Revenue concerns are holding some back. For instance, Alabama’s $230 million loss is a cautionary tale. Others see it as a worker incentive worth the cost.
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