As the push for No Tax on Tips gains moment, the other ‘Big, Beautiful Bill’ is capturing attention across the nation. Workers clocking extra hours are awaiting the Senate vote on No Tax on Overtime. It’s not just this, all eyes are set on two answers: When does No Tax on Overtime start? and Which states have No Tax on Overtime?
With legislative proposals advancing at monumental speeds at both state and federal levels, the legal landscape around overtime tax exemption states is changing. We take a peek into the current state of play, key updates on No Tax on Overtime bill states, and what lies ahead for states.
The rise of Overtime Tax Exemptions
There is no denying that the idea of exempting overtime pay from taxation emerged as a way to reward hardworking Americans. It’s a profound way to reward those in industries like healthcare, manufacturing, and retail. Under the Fair Labor Standards Act (FLSA), non-exempt employees earn at least 1.5 times their regular rate for hours worked beyond 40 per week. However, this extra income is typically taxed like regular wages, reducing take-home pay. States with tax exemption on overtime aim to change that, allowing workers to keep more of their earnings.
Alabama pioneered this trend with House Bill 217 (Act 2024-437), effective from January 1, 2024, exempting overtime pay from state income tax. This temporary measure, set to expire on June 30, 2025, has been a game-changer, boosting workers’ incomes and reportedly increasing productivity by 5% in 2024. However, the policy’s $230 million cost in its first nine months has sparked debate about its renewal.
States Following Alabama’s Lead
Several states with overtime tax exemption proposals are now in the spotlight, inspired by Alabama’s example and federal discussions. Here’s a look at key players:
- Georgia: House Bill 375, introduced in February 2025, proposes exempting overtime pay from the state’s 5.75% income tax starting in 2026. If passed, this could benefit thousands in logistics and manufacturing, though revenue concerns linger.
- Kentucky: House Bill 26, introduced recently, seeks to eliminate taxes on both overtime and tips, with a potential start date of January 1, 2026. The bill remains in early stages.
- New Jersey: Assembly Bill 2621 proposes a permanent tax exemption on overtime states, with no sunset date, positioning the state as a long-term contender.
- Minnesota: Senate Republicans are pushing for an overtime tax exemption retroactive to January 1, 2025, though the bill is still under review.
- North Carolina: House Bill 11, gaining bipartisan support, aims to exempt overtime, tips, and the first $2,500 of bonuses from state income tax, potentially starting in 2026.
Other states, including Illinois, Rhode Island, and South Carolina, have introduced bills with varying timelines. However, progress is slow and fiscal impacts are a sticking point. For instance, Illinois’ Senate Bill 2981 proposes a deduction rather than a full exemption. It may potentially start from starting mid-2025.
Federal Influence and the No Tax on Overtime Bill States
The federal no tax on overtime bill is fueling state-level action. Proposed as part of a $4.5 trillion tax cut package, the bill aims to exempt overtime pay from federal income tax, leaving Social Security and Medicare taxes intact. The House passed a budget resolution on February 25, 2025, with a narrow 217-215 vote, setting the stage for this provision. However, the No Tax on Overtime Senate vote is pending, and reconciliation with the Senate’s leaner budget could delay the no tax on overtime bill pass date. If approved by mid-2025, the no tax on overtime start date could be July 1, 2025, though January 1, 2026, is more likely due to legislative and payroll adjustments.
Bills like the Overtime Pay Tax Relief Act (H.R. 561), introduced in January 2025, propose a partial deduction capped at 20% of regular wages, with income limits for high earners. The Senate’s No Tax on Overtime Act of 2025 is also under consideration, adding complexity to the timeline.
Challenges and Criticisms
While no tax on overtime states promise relief, critics highlight significant hurdles. The federal exemption could cost $866 billion over a decade, with payroll tax exemptions pushing losses to $1.3 trillion, potentially straining Social Security. States like Alabama have already faced revenue shortfalls, with education funding hit hardest.
Critics also argue that these policies favor high earners who could reclassify income as overtime, complicating tax codes and reducing fairness. Employers might rely on overtime instead of hiring new staff, impacting job creation. Posts on X reflect public enthusiasm but also underscore the need for clarity on implementation.
What’s Next? No Tax on Overtime Updates
The future of states with no tax on overtime hinges on legislative momentum and economic trade-offs. Alabama’s decision on renewing its exemption will set a precedent. States like Georgia and Kentucky are poised to join the overtime tax exemption states list by 2026, but revenue concerns could stall progress. Federally, the no tax on overtime start date remains uncertain, with Senate action and IRS guidance as critical next steps.
For workers, the promise of tax exemption on overtime states means fatter paychecks, but HR teams must prepare for payroll shifts. Employers in no tax on overtime states may see increased demand for extra hours, requiring strategic scheduling. Stay informed by following state revenue departments and federal updates on platforms like Congress.gov.
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