As of March 6, 2025, perspectives on the tax exemption for overtime pay are evolving. Several states are taking steps to alleviate the financial strain on workers who work extra hours. This is not a trivial number; BLS data indicates that around 34 million workers exceed 40 hours of work each week. While states without taxes on overtime pay are uncommon, their movement towards tax exemption is significant, indicating a potential trend among states developing or implementing tax exemption policies for overtime.
This shift is not merely a minor adjustment to payroll; it represents a significant transformation in how rewards are perceived in a competitive labor market. Alabama’s decision to eliminate taxes on overtime pay has led to a 5% increase in volunteered overtime hours since the introduction of the tax incentive. This policy change has resulted in enhanced productivity in the state, suggesting it could create similar effects nationwide.
Why is this change so significant? States that are adopting a no tax on overtime pay stance are emerging as progressive leaders, while the growing number of states exploring tax exemption policies indicates this momentum is gaining traction. According to The Budget Lab, approximately 8% of hourly workers (or about 6.5 million individuals) depend on overtime for additional income. For HR professionals, these figures reflect more than just statistics; they signify opportunities to enhance employee retention, improve morale, and ensure compliance. Although the current list of states with no tax on overtime is short, the potential implications are substantial.
Which states have no tax on overtime pay? A state-by-state overview
Alabama takes the lead, affecting around 8% of its hourly workforce with untaxed overtime, while Georgia’s potential policy shift could benefit millions more. Although there are limited recent surveys on state no tax on overtime measures early in 2025, the Tax Foundation notes that a federal exemption could reduce revenue by $680 billion over a decade—fueling debates among HR leaders about equity and worker retention.
Alabama’s no tax on overtime has ignited a 5% increase in voluntarily worked hours, reshaping state-by-state overtime policies and prompting broader shifts in tax regulations regarding overtime pay.
We have compiled an overview of states that do not impose taxes on overtime, along with those actively seeking tax exemptions or planning to introduce such policies. For HR practitioners, the focus has shifted from questioning when will no tax on overtime be implemented, to determining which policies to adopt for smooth workforce planning.
Alabama
Alabama is currently at the forefront of states offering a tax exemption on overtime pay. As of January 1, 2024, it stands as the only state exempting overtime pay from state income tax, a move facilitated by House Bill 217 and refined through Act 2024-437.
Alabama’s exemption applies to full-time hourly workers who exceed 40 hours per week under the Fair Labor Standards Act (FLSA). This exclusion of overtime wages is effective until June 30, 2025.
This policy is not merely a superficial change for Alabama; its primary objective is to relieve financial pressure on workers while enhancing labor supply in a state struggling with workforce shortages. The absence of taxes on overtime pay in Alabama presents a compelling argument for other states contemplating similar measures. When workers retain more of their earnings, the positive effects extend to employers, families, and communities.
Georgia
Georgia is currently considering a proposal to eliminate taxes on overtime. As of February 2025, a bill is being reviewed that seeks an exemption from state income tax on overtime earnings for employees working beyond the standard 40-hour work week.
For employers in Georgia, this proposed policy is not just an abstract concept; it represents an opportunity to reevaluate payroll processes, compliance strategies, and recruitment tactics. If the Georgia overtime tax bill is passed, it has the potential to change how overtime taxation is perceived. The question of when no tax on overtime will begin in Georgia may currently be less relevant than whether it will occur at all.
If the legislation is approved, Georgia would become an attractive destination for workers willing to put in extra hours without facing tax penalties. Although not yet enacted, the current momentum suggests that Georgia is a serious contender in the movement toward states with no tax on overtime.
List of states with tax exemption on overtime
In addition to Alabama’s leadership and Georgia’s ambitious proposal, several other states are considering overtime tax exemptions with various levels of commitment.
New Jersey: Assembly Bill 2621 proposes a permanent tax exemption for overtime pay, presented as a long-term vision without a sunset clause, as observed in April 2024 tax analyses.
Rhode Island: Senate Bill 2568 seeks a temporary exemption for 2025 and 2026, offering a trial period for potential no tax on overtime legislation.
South Carolina: House Bill 4811 is under consideration, although its vague definition of “overtime income” requires further clarification as of March 6, 2025.
Illinois: Senate Bill 2981 aims for a deduction instead of a complete tax exemption on overtime pay starting in mid- or late-2025, representing a more nuanced approach that shifts some responsibilities to employees.
West Virginia: The proposal for a no tax on overtime in the state currently faces obstacles with limited details available.
Ohio: Currently, there are no indications that Ohio will implement a no tax on overtime policy, given the state’s overtime rules tied to the FLSA and a maximum state income tax rate of 3.75%.
Michigan: As of March 6, 2025, Michigan has yet to propose any changes regarding taxes on overtime, adhering to FLSA guidelines and enforcing a flat 4.25% income tax.
These state regulations concerning overtime pay taxes reflect a growing trend toward reconsidering tax exemption laws. However, there have been challenges, as seen in the failed initiatives in Mississippi and Wisconsin when their proposals for no tax on overtime faltered in April 2024.
When will Texas implement no tax on overtime?
While Texas is known for its bold initiatives, it has yet to join the ranks of states with no tax on overtime. As it stands, there is no state income tax, and Texas’ future regarding overtime tax exemptions is now contingent upon federal updates. The proposed House Budget 2025 bill includes a federal tax exemption for overtime, although as of March 5, 2025, it has not yet passed in Congress.
If the current administration’s proposal is successful, a Texas exemption on taxes for overtime could be a significant development. Until that occurs, Texas remains an observer in the evolving landscape of state-by-state no tax on overtime policies.
The federal impact on states’ no tax on overtime policies
The current federal government’s initiative to eliminate federal taxes on overtime pay is still in the proposal stage. Should this be enacted, it could provide relief for states implementing no tax on overtime policies. For HR leaders, it indicates a prudent waiting period as they reassess payroll policies, recruitment strategies, and workforce organization.
This goes beyond trivial financial sums; state overtime tax exemptions symbolize recognition of essential workers who put in extra hours. For HR professionals, it serves as a morale enhancer that requires precise payroll management.
State-by-state overtime rules are evolving from theoretical discussions to pivotal elements in the competition for talented personnel. With Alabama at the forefront and Georgia potentially following suit, the question remains: when will other states implement no tax on overtime? The answers may soon become either clear or ambiguous.
Why tax exemption on overtime pay is crucial for HR
This issue is not just an abstract policy concern regarding no tax on overtime across the United States. The state-by-state initiatives to eliminate overtime taxes represent a significant movement aimed at empowering workers who take on additional shifts and weekend work. For HR professionals, this results in necessary payroll changes, employee education regarding tax exemption policies, and utilizing untaxed overtime as a tool for enhancing employee retention.
State exemptions could also significantly influence labor market dynamics, ultimately rewarding dedication while compelling employers to adapt quickly. Alabama has taken bold steps; Georgia is nearing a decision. The landscape of overtime regulations across states remains highly fluid.
What lies ahead for the expanding list of states with no tax on overtime?
Alabama stands as the singular champion of the no tax on overtime movement, while Georgia is close to finalizing its proposal. Meanwhile, New Jersey, Rhode Island, South Carolina, Illinois, and West Virginia showcase a blend of ambition and caution regarding their overtime tax policies. Texas is still awaiting a federal initiative to join the ranks of states embracing tax exemptions on overtime.
The ongoing dialogue surrounding which states will endorse no tax on overtime is transitioning to who may follow next. For HR professionals, this goes beyond a mere trend; it’s a vital call to reconsider the valuation of overtime in an ever-evolving economy.
Interested in how states with no tax on overtime could impact workforce planning? Subscribe to The HR Digest for the latest updates on No Tax on Overtime and receive insights straight to your inbox.
