States with no tax on overtime pay, who is leading in tax exemption?

As of March 6, 2025, sentiment on tax exemption on overtime pay is shifting. A handful of states are stepping up to ease the burden on workers’ extra hours. Now, this is not a small number to be dismissed. According to BLS data, an estimated 34 million workers clock beyond 40 hours weekly. States with no tax on overtime pay are rare, but they’re making huge waves by leaning towards tax exemption on overtime pay. This offers a glimpse into a growing list of states with tax exemption on overtime policies either active or in the works.

The current shift is no longer a mere payroll tweak. It’s a redefinition of reward in the tight labor market. Alabama’s no tax on overtime pay has brought a 5% spike in overtime volunteered since the tax break was introduction. The state showed a productivity boost with its policy chance that could ripple nationwide.

What makes this so monumental? States with no tax on overtime pay are emerging as leaders, while a growing list of states of states with tax exemption on overtime policies signals momentum. According to The Budget Lab, roughly 8% of hourly workers (i.e. 6.5 million) rely on overtime to rake more money. For HR leaders, this isn’t just numbers, it’s a chance to revisit retention, morale and compliance. The list of states with no tax on overtime pay may be short now, but the stakes? They’re higher than ever before.

Which states do no tax on overtime pay? A state-by-state breakdown

Alabama leads, impacting roughly 8% of its hourly workforce with untaxed overtime, while Georgia’s potential shift could affect millions more. Though recent polls on state no tax on overtime rules are scarce this early in 2025, the Tax Foundation notes a federal exemption could cut revenue by $680 billion over a decade—fuel for HR debates on fairness and retention.

Alabama’s no tax on overtime has sparked a 5% rise in volunteered hours, reshaping state-by-state overtime rules and bringing a broader shifts in overtime pay tax overtime policies.

Below, we’ve compiled a list of states with no tax on overtime. It also includes a list of states with tax exemption on overtime policies or on the horizon to enact this relief. For HR professionals, it’s no longer a question of when is no tax on overtime starting, but about what policies to enact for a seamless workforce planning.

Alabama

Alabama has taken the lead in states offering tax exemption on overtime. Since January 1, 2024, it stands as the only state fully exempting overtime pay from state income tax. This policy is rooted in House Bill 217 and refined by Act 2024-437.

Alabama’s overtime pay exemption applies to full-time hourly workers exceeding 40 hours a week under the Fair Labor Standards Act (FLSA). The state’s exclusion of overtime wages is in place through June 30, 2025.

This is far from a gimmick for Alabama. The move aims to ease financial strain on workers and increase labor supply in a sate grappling with labor shortages. Overtime pay taxation in Alabama offers a compelling case for states considering no tax on overtime. When workers keep more money, the ripple effects touch employers, families and communities.

Georgia

Currently, Georgia is one of the states on the cusp of no tax on overtime proposal. A bill is under consideration as of February 2025 seeks a Georgia overtime tax exemption. It will strip state income tax from overtime compensation of workers who do beyond the standard 40-hour work week.

For Georgia employers, this isn’t an abstract policy. It’s a call to reassess payroll systems, compliance policies, and recruitment pitches. The Georgia overtime tax bill could transform how overtime pay tax is perceived. So, when is no tax on overtime starting in Georgia? It’s not a question of when, but if, for now.

If passed, the state’s no tax on overtime will position it as a haven for workers eager to work beyond their hours without a tax hit. While not yet law, the current momentum signals a serious contender in the no tax on overtime states race.

List of states with tax exemption on overtime

Beyond Alabama’s lead and Georgia’s ambitious proposal, several states are exploring overtime tax exemptions with varying degrees of commitment.

New Jersey: Assembly Bill 2621 proposes a permanent tax exemption on overtime pay. It’s bided as a long-term vision with no sunset date, as noted in April 2024 tax analyses.

Rhode Island: Senate Bill 2568 targets a temporary 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 polishing as of March 6, 2025.

Illinois: Senate Bill 2981 plans for a deduction rather than a full tax exemption on overtime pay starting in mid- or late-2025. It’s a nuanced approach that shifts responsibility to employees.

West Virginia: The state’s no tax on overtime proposal is in limbo for now with scant details.

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 signaled a shift toward no tax on overtime laws by state.

Michigan: Michigan’s no tax on overtime proposal remains nonexistent as of March 6, 2025. The state adheres to FLSA overtime rules and levies a flat 4.25% income tax. There’s no relief on overtime pay taxation for now.

These state overtime pay tax regulations highlight a growing 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.

When does no tax on overtime start in Texas?

The state loves a bold headline, but it’s yet to join the list of states with no tax on overtime. So, when does no tax on overtime start in Texas? With no state income tax to begin with, the Lone Star state’s fate now hinges on federal overtime tax updates. The House Budget 2025 bill floats a federal tax exemption on overtime, but as of March 5, 2025, it’s yet to pass in Congress.

If the current administration gets its way, a Texas overtime tax exemption could be a huge wave. Until then, Texas is a bystander in the state-by-state no tax on overtime stakes.

Federal influence on states with no tax on overtime policy

The current administration’s push to remove federal taxes on overtime pay remains a proposal for now. If enacted, states with no tax on overtime may see a relief. For HR leaders, this signals a waiting time on renewed payroll policy, recruitment and workforce planning.

This isn’t about more nickels and dimes. State overtime tax exemptions signal respect for frontline workers burning midnight oil. For HR leaders, it’s a morale booster that demands payroll precision.

State-by-state overtime rules are no longer a dusty proposal. They may metastasize into a weapon in the war for talent. Alabama is leading the charge; Georgia may join the list of states with no tax on overtime exemption. But, when will no tax on overtime take place in other states? It’s either in or out, for now.

Why tax exemption on overtime pay matters to HR

This isn’t an abstract no tax on overtime policy in states across America. The state-by-state no tax on overtime initiatives signals a huge push to empower workers who pick up late shifts and weekend gigs. For HR professionals, the implications are payroll adjustments, employee education on tax exemption on overtime policy, and a chance to use untaxed overtime as a retention tool.

State overtime tax exemptions could also tip the scales in tight labor markets. It will finally reward dedication while challenging employers to adapt swiftly. Alabama has done it, Georgia is close. The rest of the state-by-state overtime rule map is a live wire.

What’s next for the growing list of states with no tax on overtime?

Alabama takes the lead as the sole no tax on overtime states champion, with Georgia close to the finish line. New Jersey, Rhode Island, South Carolina, Illinois, and West Virginia are still a mix of ambition and caution with their views on state overtime tax policies. Texas waits for a federal lifeline to join the list of states with tax exemption on overtime.

The question of which state do no tax on overtime is still evolving into who is next. The HR professionals, this is more than a trend. It’s a clarion call to rethink how we value overtime in an economy that never sleeps.

Want to know how states with no tax on overtime could reshape workforce planning? Subscribe to The HR Digest for the latest No Tax on Overtime updates for insights delivered straight to your inbox.

The post States with no tax on overtime pay, who is leading in tax exemption? appeared first on The HR Digest.

Source: New feed