No Tax on Overtime by State: Which States Honor the OBBB Deduction and Which Don't

The federal "no tax on overtime" deduction lowers state income tax in only a small group of states.

For most employers, the employee message is simpler than the tax mechanics: the federal deduction may help at filing time, but state tax usually does not change.

The reason is where the state return starts. IRC § 225 reduces federal taxable income, not federal AGI. Most states start from federal AGI, so the deduction never flows into the state return unless the state creates its own subtraction.

Only five states start from federal taxable income: Colorado, Idaho, North Dakota, Oregon, and South Carolina. Colorado added the deduction back. Oregon retained it. Idaho, North Dakota, and South Carolina currently pass it through by default. That leaves four states where the federal overtime deduction currently lowers state taxable income.

The rest of the country falls into practical buckets: no wage income tax, AGI-starting with no passthrough, own-tax-base states, explicit add-back states, and a few states with their own smaller state-level benefit. Telling those apart matters when an employee asks, "Does this lower my state taxes too?"

Skip to the state-by-state table →

For the federal mechanic (cap, phase-out, Box 12 code TT reporting) and an interactive federal tax-savings estimator, see our no-tax-on-overtime guide. This article is the state-by-state companion.

Quick reference

• Where § 225 actually reduces state taxable income (4 states, all FTI-starting): Oregon (retained via SB 1507, signed April 9, 2026); Idaho, North Dakota, South Carolina (passive — rolling conformity, no decoupling legislation).
• The single explicit FTI-starting decoupler (1 state): Colorado — HB 25-1296 (signed May 16, 2025) preemptively added back the federal § 225 deduction before OBBB itself was enacted on July 4, 2025.
• AGI-starting states with state-level OBBB-equivalent provisions (2 states): Arizona (Gov Hobbs Executive Order 2025-15, November 25, 2025 — directs ADOR to add OBBBA deductions including overtime to Form 140; legally precarious because no statute is enacted), Georgia (HB 463, signed by Gov Kemp on May 11, 2026 — smaller state-level exclusion capped at $1,750 for overtime + $1,750 for tips, separate from the federal § 225 deduction; explicit decoupling from federal § 224/§ 225 via the same package).
• AGI-starting jurisdictions with explicit non-conformity statements (7 jurisdictions): California (SB 711, Ch 231 of 2025, conformity date 1/1/2025), New York (IT-225 add-back codes), Illinois (administrative non-conformity; ~$267M revenue protection per IL OMB), Maine (Gov Mills Determination 10/1/2025 under P.L. 2025 c. 336), Hawaii (fixed-date freeze pre-OBBB), Connecticut (signaled non-conformity), District of Columbia (Temporary Conformity Act + contested Congressional disapproval).
• AGI-starting states that decoupled from selected OBBBA provisions but did NOT address § 225 specifically — § 225 has no state effect anyway: Massachusetts (HB 4975 pending; addresses §174A/§163(j)/§168(n)/§179(b)/§1400Z), Virginia (HB 29 / Chapter 7 of 2026 Acts; addresses §168(k)/§168(n)/§174/§174A/§163(j)).
• 9 no-income-tax states (moot): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
• 5 own-tax-base states (no automatic effect): Alabama, Arkansas, Mississippi, New Jersey, Pennsylvania. Each computes state income tax on its own income classes; OBBB does not flow through without affirmative legislation.
• Employer Box 12 code TT reporting is identical in all 50 states. Federal information return under 26 U.S.C. § 6051(a)(19); the FLSA-premium portion only, regardless of state-conformity posture.

The 5 Most Expensive State-Conformity Misconceptions

1. "My state automatically follows federal tax law, so the deduction passes through to my state return." Wrong unless you're in exactly five states — and one of those has already decoupled. § 225 is below-the-line. It reduces federal taxable income (Form 1040 line 15), not federal adjusted gross income (line 11b). The 31 states + DC that start their state tax base from federal AGI never see the deduction in the first place — even if they have rolling conformity. Only Colorado, Idaho, North Dakota, Oregon, and South Carolina start from federal taxable income. Colorado decoupled via HB 25-1296 before OBBB was enacted; Oregon retained the passthrough affirmatively via SB 1507; Idaho, North Dakota, and South Carolina pass through by default. So the world where the deduction reduces state taxable income is exactly four states. Everywhere else, the federal deduction has no state-level effect, regardless of whether the state has issued a "decoupling" statement.

2. "Decoupled means the state doesn't tax overtime at all." Wrong. Decoupled means the state taxes the FLSA-premium portion of overtime exactly the same as regular wages — the federal § 225 deduction does not reduce state taxable income. The federal deduction still works on the federal 1040; the state deduction simply doesn't exist. A California worker earning $1,250 of FLSA-premium overtime in 2026 saves at the federal level (capped at $12,500, phased out above $150K MAGI) and pays California state tax on the full $1,250.

3. "If a worker lives in Texas, I don't have to do Box 12 code TT reporting." Wrong. Box 12 code TT is a federal information-return requirement under IRC § 6051(a)(19), required for every FLSA-nonexempt employee on every 2026 W-2 regardless of work state. The Texas worker still uses the W-2 to claim the federal deduction on their federal return; the fact that Texas has no income tax means there's nothing to add back at the state level, not that the federal reporting goes away. The penalty for incorrect or omitted Box 12 reporting is $310 per W-2 under IRC § 6721, capped at $3.78M per employer per year (2026 figures).

4. "California has its own state-level overtime deduction to make up the difference." Wrong. California has explicitly declined to conform. SB 711, signed by Governor Newsom on October 1, 2025 (Chapter 231 of 2025 Statutes), amended Revenue and Taxation Code § 17024.5(a)(1) to add subdivision (Q): "For taxable years beginning on or after January 1, 2025 ........ January 1, 2025." That single line sets California's IRC conformity date to a point six months before OBBB's July 4, 2025 enactment. The California Franchise Tax Board's November 2025 Tax News bulletin confirms: "the changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for the overtime paid." Combined with California's daily 8-hour overtime, daily double-time, and 7th-consecutive-day premiums that don't qualify federally (see overtime rules by state), California-based hourly workers see the lowest combined benefit nationally from "no tax on overtime."

5. "My state passed a decoupling bill, so it must affect § 225." Not always. Massachusetts HB 4975 (Healey, Jan 15, 2026) proposes temporary non-conformity to OBBBA — but the bill addresses IRC §§ 174A, 163(j), 168(n), 179(b), and 1400Z, not § 225 specifically. Virginia HB 29 (Chapter 7 of 2026 Acts, signed by Governor Spanberger February 20, 2026) sets Virginia's conformity date to December 31, 2025 — AFTER OBBB's July 4, 2025 enactment — and decouples from § 168(k), § 168(n), § 174 / § 174A, and modifies § 163(j); the bill does not address § 225. In both states, § 225 has no state effect anyway because both are AGI-starting. The "decoupling bill" framing in industry press conflates structural non-passthrough with statutory non-conformity. Reading carefully matters.

How state conformity actually works

State income-tax conformity to § 225 depends on three independent variables: where the state's tax base begins on the federal return (AGI vs. federal taxable income vs. own income classes), whether the state has rolling or static (fixed-date) IRC conformity, and whether the state has passed legislation that affirmatively addresses § 225 specifically.

The statute: what § 225 actually says

IRC § 225(a) (the grant of the deduction):

"There shall be allowed as a deduction an amount equal to the qualified overtime compensation received during the taxable year."

IRC § 225(c)(1) (the definition that determines what counts):

"For purposes of this section, the term 'qualified overtime compensation' means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed."

Two phrases in subsection (c)(1) do the load-bearing work for everything that follows. "Required under section 7 of the Fair Labor Standards Act" restricts qualifying overtime to FLSA-required weekly-40-hour overtime — excluding California daily 8-hour overtime, daily double-time, 7th-consecutive-day premiums, CBA premiums above the FLSA floor, and exempt-employee policy "overtime." "In excess of the regular rate" restricts the deduction to the 0.5× premium portion only — not the full 1.5× overtime check. The two restrictions cost taxpayers tens of billions of dollars in the aggregate; they are not throwaway prepositions.

Fact 1 — § 225 is below-the-line, not above

The deduction lives on new Schedule 1-A and flows to Form 1040 line 13b — after AGI is calculated on line 11b and before taxable income on line 15. In tax-policy terms, the deduction is below-the-line: it reduces federal taxable income but does NOT reduce federal AGI.

This placement is load-bearing for every state's analysis:

• A state that starts its tax base from federal AGI (Form 1040 line 11b) literally never sees the deduction. The number imported from the federal return was computed without subtracting § 225. No passthrough is possible without affirmative state legislation that imports the deduction separately via state-level subtractions.
• A state that starts from federal taxable income (Form 1040 line 15) imports the post-§-225 number. The deduction has already reduced what flows into the state base. To prevent passthrough, the state legislature must add back the deduction.

Fact 2 — three starting-point postures across the 50 states

Per the Tax Policy Center briefing book, 31 states + DC start their state tax base from federal AGI; 5 states start from federal taxable income; 5 states use neither (their own income classes / tax base).

The 5 federal-taxable-income states are Colorado, Idaho, North Dakota, Oregon, and South Carolina — the only states where § 225 has any automatic effect at all. The 5 own-base states (Alabama, Arkansas, Mississippi, New Jersey, Pennsylvania) compute taxable income using their own statutory income classes; OBBB has no automatic flow-through.

Fact 3 — rolling vs static conformity (matters for IRC sections, not for the starting-point question)

Independent of the starting-point question, states fall into:

• Rolling-conformity states automatically incorporate IRC changes as Congress enacts them. To opt out, the legislature must pass a decoupling statute. Most states use this model.
• Static (fixed-date) conformity states adopt the IRC as of a specific date. To pick up a new IRC change, the legislature must affirmatively advance the conformity date past the enactment of the federal change. Roughly one-third of states use this model — California (now 1/1/2025), Arizona, North Carolina, Ohio, Virginia (now 12/31/2025), Massachusetts among the larger ones.

Static conformity is itself a decoupling-by-default mechanism for any IRC change enacted after the state's conformity date. California's SB 711 set its conformity date to January 1, 2025 — six months before OBBB's July 4, 2025 enactment — so OBBB is structurally outside California's tax base. Virginia's HB 29 set its date to December 31, 2025 — AFTER OBBB's enactment — which means OBBB IS within Virginia's static-conformity window for any provision Virginia doesn't separately decouple from. Virginia decouples from § 168(k), § 168(n), § 174 / § 174A, and modifies § 163(j); HB 29 does not address § 225. Virginia's no-passthrough outcome for § 225 comes from being AGI-starting, not from HB 29.

The four practical buckets

Bucket 3 is where the action is — and is where Colorado, Idaho, North Dakota, Oregon, and South Carolina sit. The "9 decouplers" you may see in industry reporting collapses two distinct things: (a) the one FTI-starting state (Colorado) that took legislative action to block what would otherwise have been an automatic passthrough, and (b) AGI-starting states that issued non-conformity statements clarifying what their structural posture already implies. Both produce the same outcome — no state-level deduction for the worker — but only the first kind required legislative action.

Colorado — the one FTI-starting decoupler that mattered

Colorado is the most consequential single state for § 225 conformity, because Colorado is the only state where the legislature had to act affirmatively to prevent a passthrough.

Colorado is rolling-conformity and starts state taxable income from federal taxable income (Form 1040 line 15). Absent legislative action, § 225 would have reduced Colorado state taxable income by the same amount it reduces federal taxable income. The Colorado legislature acted before OBBB was even enacted.

HB 25-1296, signed May 16, 2025 by Governor Polis. Section 6 amends CRS § 39-22-104 to require that "the amount of any overtime compensation excluded or deducted from a taxpayer's federal gross income" be added back to federal taxable income for purposes of calculating Colorado state taxable income. Effective tax year 2026. The Colorado DR 0104 (Individual Income Tax Return) booklet for tax year 2025 includes the framework; the tax-year-2026 DR 0104 adds a line labeled "Excess federal deduction for overtime pay" for the add-back computation.

The bill was passed seven weeks before OBBB itself was signed (May 16 vs July 4, 2025). The Colorado Legislative Council Staff's fiscal note projected approximately $119 million in annual revenue protection (ITEP's independent analysis aligns closely).

Pending TABOR challenge. Advance Colorado filed suit in Denver District Court on July 24, 2025, alleging HB 25-1296 violates the Colorado Taxpayer Bill of Rights (TABOR). Plaintiffs include state Senator Barbara Kirkmeyer (R-Brighton), former Senate president Kevin Grantham, and two El Paso County employees entitled to overtime pay. The complaint argues that the bill effectively imposes a new tax without voter approval, which TABOR prohibits. The statute remains in effect pending the lawsuit's resolution; payroll teams should not assume reversal.

States where § 225 passes through to state taxable income

These are the four states where the federal deduction reduces state taxable income for tax year 2026. All four are federal-taxable-income-starting states; none has enacted decoupling legislation that addresses § 225 specifically.

Oregon — affirmative passthrough (SB 1507)

Oregon's Senate Bill 1507, signed into law by Governor Tina Kotek on April 9, 2026, partially disconnected Oregon from selected OBBBA provisions — but explicitly RETAINED conformity to the overtime and tips deductions. SB 1507 disconnected from two corporate-side tax cuts and one auto-loan-interest provision; the income tax cuts on overtime and tips were kept under the bill. The Oregon Legislative Revenue Office projected approximately $300 million in net state revenue savings across the 2025-2027 biennium from the disconnect, with the OT/tips passthrough being a meaningful cost retained.

Oregon is the only state in 2026 where the legislature affirmatively chose to retain the OBBB overtime passthrough. Oregon Department of Revenue guidance for the 2026 filing season confirms the state-level deduction applies.

Practical effect for Oregon workers: An Oregon FLSA-nonexempt worker earning $25/hour with 10 hours of federally-qualifying overtime per week (520 hours/year) gets a $6,500 federal deduction (the 0.5× premium portion). That same $6,500 reduces Oregon taxable income too — Oregon's marginal rate at typical wage levels is 8.75%, so the Oregon savings is approximately $569. Total federal + Oregon savings at a 22% federal bracket: roughly $1,430 federal + $569 Oregon = ~$2,000 per year. Symmetric to the California worker described below who gets ~$1,430 federal + $0 state.

Idaho — passive passthrough (rolling FTI conformity)

Idaho starts state taxable income from federal taxable income and has rolling conformity to the IRC. Idaho has not enacted decoupling legislation specifically addressing § 225 for tax year 2026 (per ITEP and Thomson Reuters trackers as of May 2026; verify with the Idaho State Tax Commission before relying for material amounts). Idaho's projected revenue impact from the OBBB overtime passthrough is approximately $167 million annually per ITEP analysis.

Some industry analyses note that Idaho froze its IRC conformity date in late 2024 (alongside Arizona, Georgia, Hawaii, Kentucky, South Carolina, South Dakota, West Virginia) — which would mean Idaho doesn't pick up OBBB at all. The 2026 picture is genuinely contested in secondary sources; primary Idaho State Tax Commission bulletin for tax year 2026 has not surfaced explicit § 225 guidance as of May 2026. Workers and payroll teams should check the Idaho State Tax Commission for current posture.

North Dakota — passive passthrough (rolling FTI conformity)

North Dakota starts state taxable income from federal taxable income and has rolling conformity. No decoupling legislation enacted as of May 2026. ITEP projects approximately $29 million in annual revenue passthrough — the smallest among the FTI-starting passthrough states. North Dakota's relatively flat marginal-rate structure (top rate 2.5%) means the per-worker state-level savings is modest even where the passthrough applies.

South Carolina — passive passthrough (rolling FTI conformity)

South Carolina starts state taxable income from federal taxable income and has rolling conformity. No decoupling legislation enacted as of May 2026; the state legislature is in "wait-and-see" mode per industry reporting. ITEP projects approximately $521 million in annual revenue passthrough — the largest fiscal impact of any state passing the deduction through, larger than every confirmed decoupler except California's $3.2 billion structural non-conformity.

South Carolina's status illustrates the cost of doing nothing for a state that didn't anticipate the federal provision. The state legislature may act in the 2026 or 2027 session to either codify the passthrough or add it back; verify with the South Carolina Department of Revenue before relying.

AGI-starting jurisdictions with explicit non-conformity statements

These jurisdictions have publicly stated that the federal § 225 deduction will not reduce state taxable income. The statements reinforce what the structural AGI-starting posture already implies — but they matter for employee communications, state form completeness, and any state-side subtraction pathway the modification schedule might otherwise create. Each is essentially belt-and-suspenders.

California — SB 711 (Chapter 231 of 2025 Statutes)

California's Senate Bill 711, signed by Governor Newsom on October 1, 2025, amended Revenue and Taxation Code § 17024.5(a)(1) by adding subdivision (Q):

"(Q) For taxable years beginning on or after January 1, 2025 ........ January 1, 2025"

That language sets California's IRC conformity date to January 1, 2025. OBBB was enacted on July 4, 2025 — after the cutoff — so § 225 is structurally outside California's tax base. The California Franchise Tax Board November 2025 Tax News bulletin confirmed: "the changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for the overtime paid." The March 2026 Tax News update reaffirmed the position.

Projected revenue protection from non-conformity is approximately $3.2 billion annually — the largest fiscal impact of any state's posture on OBBB. The combined posture for California hourly workers — federal § 225 disqualifies California daily overtime, daily double-time, and 7th-day premiums (the bulk of California overtime), plus no state-level deduction for what little FLSA-weekly-40 OT remains — produces the lowest net benefit nationally.

New York — IT-225 add-back codes

New York's tax base begins from federal AGI (Form IT-201 line 19), which is itself derived from Form 1040 line 11b. Because § 225 reduces federal taxable income but not federal AGI, the deduction does not automatically flow into New York's tax base. New York's IT-225 (New York State modifications) form is the schedule where additions and subtractions to federal AGI are reported.

The New York Department of Taxation and Finance has added two new codes to the IT-225 for tax year 2026: "Add-back of exempt overtime pay" and "Add-back of exempt tip income." Workers who claim § 225 federally report the federally-deducted amount as an addition modification on IT-225 and attach IT-225 to their IT-201 (resident) or IT-203 (non-resident) return.

The pragmatic effect of the IT-225 add-back codes: ensure that if any pathway (state-level itemized-deduction modification, state-specific election, federal subtraction modification mirroring § 225) would have allowed the federal deduction to reduce New York taxable income, the add-back closes it. The codes are belt-and-suspenders against the AGI-starting structural posture.

Separately, Governor Hochul proposed Senate Bill S587-A in January 2026 to create a state-level exemption for tipped income — but that proposal targets tips only and does not extend to overtime. The IT-225 add-back of federal exempt overtime remains in place regardless of the tip-bill outcome.

Illinois — administrative non-conformity (~$267M revenue protection per IL OMB)

Illinois starts state taxable income from federal AGI and applies a flat 4.95% income tax rate. Illinois has decoupled administratively, requiring an add-back for any tip or overtime deduction federally claimed. The Illinois Office of Management and Budget cited approximately $267 million in annual revenue protection as the policy rationale.

Per Illinois Department of Revenue guidance and the University of Illinois Tax School analysis, Illinois employers must implement dual-track reporting for tax year 2026: federal taxable income with the OBBB deduction applied (employee-side at filing); Illinois state taxable income with the deduction added back (employer-side withholding + employee-side at filing). Payroll systems that compute Illinois withholding from federal taxable income rather than federal AGI need configuration audits to avoid under-withholding state tax.

As of February 2026, no Illinois bill to create a state-level overtime deduction has been enacted.

Maine — Governor's Determination + LD 2010

Maine has a unique mechanism: Public Law 2025, c. 336, effective September 23, 2025, authorizes the Governor to direct the State Tax Assessor on temporary conformity matters without going back to the full legislature. Under that authority, on October 1, 2025, Governor Janet Mills issued a Determination and Direction to the State Tax Assessor adopting limited OBBBA provisions (§ 179 expensing and certain R&D deductions) but explicitly declining to conform to "no tax on tips" and "no tax on overtime."

The Governor's cited rationale was approximately $27.8 million in state revenue cost to conform to the overtime deduction alone, against Maine's constitutionally required balanced budget. For tax year 2026, LD 2010 (introduced in the 132nd Maine Legislature's Second Regular Session, January 2026) extends the Governor's posture into permanent statute. The bill recommends conforming to a small set of OBBBA provisions (standard deduction adjustments, charitable contributions) but explicitly does NOT recommend conformity to overtime or tips deductions.

Maine's Form 1040ME begins from federal AGI, so the no-passthrough outcome for § 225 is structurally guaranteed. The Determination + LD 2010 codify what the structural posture already implies.

Hawaii — fixed-date freeze pre-OBBB

Hawaii is a fixed-date conformity state that froze its IRC conformity date in late 2024, before OBBBA's enactment. Per Tax Foundation analysis, Hawaii is one of several states (Arizona, Georgia, Idaho, Kentucky, South Carolina, South Dakota, West Virginia) that pre-emptively decoupled through their fixed-date mechanism. Hawaii has not advanced its conformity date past OBBB; Hawaii Department of Taxation guidance specific to § 225 is pending as of May 2026.

Hawaii is also AGI-starting, so the no-passthrough outcome is doubly structurally guaranteed.

Connecticut — signaled non-conformity

Connecticut has indicated through industry-tracked reporting that it will not conform to the federal overtime deduction. Connecticut Department of Revenue Services primary guidance is pending. Connecticut is AGI-starting and rolling-conformity, so the federal deduction wouldn't have flowed through automatically; the signaling reinforces a structural default rather than reversing a passthrough.

District of Columbia — Temporary Conformity Act (legally contested)

DC's posture is the most unsettled jurisdiction in the country. On November 3, 2025, Council Chairman Phil Mendelson introduced legislation to decouple DC's tax code from OBBBA tips, overtime, car-loan-interest, and the $6,000 senior deduction. The DC Council passed the Temporary Conformity Act as an emergency bill the next day, November 4, skipping public hearings. The DC CFO scored the decoupling at approximately $100 million in FY2026 revenue gain (with five-year revenue exposure of approximately $650 million cited in the broader debate).

Congress then exercised its Home Rule Act authority and passed a disapproval resolution — H.J. Res. 142 — through the House on February 4, 2026; the Senate on February 12, 2026 (49-47); signed by the President on February 18, 2026. On February 24, 2026, DC Attorney General Brian Schwalb issued a formal legal opinion concluding that the congressional disapproval resolution does not alter District taxpayers' 2025 tax liabilities and that the Temporary Conformity Act remains in effect. The DC CFO is seeking further guidance.

The legal status for tax year 2025 is genuinely contested. DC is AGI-starting structurally, so even if the federal authority controls, § 225 has no automatic passthrough into DC's tax base; the contested question is primarily about other OBBBA provisions that DC's bill addressed (tips, car-loan-interest, senior deduction, plus corporate-side provisions). For payroll teams with DC-based workers: prudent posture is tracking federal § 225-qualifying overtime separately and standing ready to apply either treatment depending on how the dispute resolves before the 2026 filing season opens.

AGI-starting states with state-level OBBB-equivalent provisions

A small but growing category: AGI-starting states that have created their own state-level OBBB-equivalent deduction or exclusion, separate from the federal § 225 pathway. The mechanism is different from FTI-starting passthrough — the federal deduction still doesn't reduce state taxable income — but the worker gets a state-level benefit via a parallel state-side provision.

Arizona — Executive Order 2025-15 (legally precarious)

On November 25, 2025, Arizona Governor Katie Hobbs issued Executive Order 2025-15 directing the Arizona Department of Revenue to "build five OBBBA provisions into Arizona Form 140" — the higher standard deduction, the $6,000 senior deduction (age 65+), the tip income deduction, the overtime deduction, and the auto loan interest deduction. ADOR added the corresponding lines on Form 140 for tax year 2025 filings.

The catch is that no Arizona statute has been enacted. Two conformity bills were vetoed by Governor Hobbs earlier in the year; the Executive Order is the workaround. Claiming any of these OBBBA provisions on Form 140 rests on an executive order, not enacted law. Practitioner commentary (e.g., Ed Zollars CPA) flags the legal precariousness — an EO can be challenged or revoked, and the ADOR forms it directs could be reversed mid-filing-season. For payroll teams with Arizona workers: the state withholding configuration should follow the EO posture for now (state deduction available on Form 140) but track Arizona Department of Revenue bulletins through the 2026 filing season for any change.

Arizona is the clearest example of "AGI-starting state with state-level equivalent provision available" — the worker gets a state benefit, but the basis is administrative-by-EO rather than statutory.

Georgia — HB 463 (smaller state-level exclusion + explicit § 225 decoupling)

Georgia's HB 463 (the "Georgia Economic Growth and Tax Relief Act of 2026"), signed by Governor Kemp on May 11, 2026, did two things relevant to § 225 conformity:

1. Created a separate, smaller state-level overtime exclusion for tax years 2026-2028: up to $1,750 in qualified overtime compensation and $1,750 in cash tips are exempt from Georgia state income tax. This is a state-level benefit comparable in shape to (but much smaller than) the federal § 225 deduction.
2. Explicitly decoupled from federal § 224/§ 225. The conformity-update bill (HB 1199) advanced Georgia's IRC conformity date to January 1, 2026 (AFTER OBBB's July 4, 2025 enactment), but Georgia decouples from the federal § 224/§ 225 provisions in the same package. The federal $12,500 deduction does not reduce Georgia taxable income.

Practical effect for a Georgia FLSA-nonexempt worker with substantial OBBB-qualifying overtime: full federal § 225 deduction on the 1040 (capped at $12,500 / phased out above $150K MAGI) PLUS Georgia state-level exclusion capped at $1,750. At Georgia's 4.99% flat rate, the state-level benefit is ~$87 (4.99% × $1,750). The combined federal + state benefit lands between an AGI-starting non-conformer (federal only) and a full FTI-starting passthrough (federal + state at full marginal rate).

Georgia is the clearest example of "AGI-starting state that designed its own smaller state-level OBBB-equivalent." Watch for similar patterns in other state legislative sessions through 2026-2027.

AGI-starting states with OBBBA decoupling bills that don't address § 225

These states have passed or proposed legislation decoupling from selected OBBBA provisions — but the bills do not address § 225. The state-level non-passthrough comes from the structural AGI-starting posture, not from the bills themselves.

Massachusetts — HB 4975 (pending; addresses §§ 174A / 163(j) / 168(n) / 179(b) / 1400Z)

Governor Maura Healey introduced HB 4975 on January 15, 2026, proposing temporary non-conformity to selected OBBBA provisions for approximately two years. Per EY tax news coverage, the bill specifically addresses IRC §§ 174A (R&E deductions), 163(j) (business interest), 168(n) (qualified production property), 179(b) (small-business expensing), and 1400Z (opportunity zones). The bill does not address § 225.

The Massachusetts Comptroller projected approximately $664 million in aggregate revenue cost if all OBBBA provisions flowed through Massachusetts's tax base. HB 4975 reflects the policy concern but addresses corporate-side provisions, not the individual-side § 225 deduction. Massachusetts is AGI-starting; the no-passthrough outcome for § 225 is structurally guaranteed regardless of HB 4975's fate. As of late February 2026, HB 4975 had been referred to the Joint Committee on Revenue, which held a hearing on February 12, 2026. The bill is not yet enacted.

Virginia — HB 29 (Chapter 7 of 2026 Acts; addresses §§ 168(k) / 168(n) / 174 / 174A / 163(j))

Virginia's House Bill 29, Chapter 7 of the 2026 Acts of Assembly, was signed by Governor Abigail Spanberger on February 20, 2026. The bill sets Virginia's static IRC conformity date to December 31, 2025 — AFTER OBBB's July 4, 2025 enactment — and explicitly decouples from § 168(k) (bonus depreciation), § 168(n) (qualified production property), §§ 174 / 174A (R&E expenses), and modifies § 163(j) (business interest). HB 29 does not address § 225.

Virginia is AGI-starting, so § 225 has no automatic passthrough into Virginia taxable income. The Virginia DHRM January 2026 HR Highlights bulletin confirms OBBBA provisions are not part of Virginia's tax base for tax year 2026. The structural posture is the load-bearing reason — HB 29 codifies decoupling from specific corporate-side provisions but does not need to address § 225 to prevent its passthrough.

Virginia's FY2026 revenue protection from the static-conformity-date freeze + explicit decoupling is approximately $200.3 million per the Virginia Department of Taxation fiscal projection.

California — the strictest combined posture

California is the largest single-state impact in the country and illustrates how state-conformity compounds with state overtime law. Workers in California are paid more overtime per capita than workers in any other state — daily 8-hour overtime, daily double-time after 12, the 7th-consecutive-day premium, plus all the FLSA-weekly-40 overtime — and almost none of the state-specific premiums qualify for the federal § 225 deduction in the first place. SB 711 then strips the state-level benefit for what little FLSA-qualifying overtime remains.

The arithmetic for a California hourly worker earning $25/hour with 10 hours of FLSA overtime per week (520 hours/year):

• Federal deduction: $25/hr × 0.5 (premium portion) × 520 hours = $6,500 deductible. At a 22% marginal federal bracket, approximately $1,430 in federal tax savings. Capped at $12,500 for higher-earning workers; phased out above $150K MAGI.
• California state deduction: $0. The FLSA-premium portion of overtime that qualifies federally is excluded from California's tax base via SB 711's pre-OBBB conformity-date cutoff. The worker pays California state tax (effectively at a marginal 9.3% on typical wage levels) on the full FLSA-premium amount — approximately $605 of additional state tax on the $6,500.

For a California worker with significant daily-overtime exposure but only modest weekly-overtime exposure, the federal deduction can land near zero (because state-only OT premiums never qualified federally) while the state continues taxing every dollar of premium. This is the worst combined posture in the country.

Things California employers consistently miss

The non-qualifying state OT isn't part of Box 12 code TT. Box 12 code TT is the FLSA-required 0.5× premium on hours over 40 in a workweek — federal only. California daily 8h overtime, daily double-time, the 7th-consecutive-day premium, and any CBA premium above the FLSA floor must NOT be reported in Box 12 code TT. Including them inflates the federal deduction the employee claims, which is an § 6721 violation at $310 per W-2 (2026 figures).

The state-only OT still gets withheld at California rates on the full premium. The state-only overtime never qualified federally and never got an OBBB deduction anywhere; California taxes it as wages. The only thing SB 711 changed is the federal § 225-qualifying portion — which is now also taxed by California instead of flowing through to state taxable income.

The Schedule CA (540) adjustment. California's Schedule CA (540) is the state-modification schedule for individuals — the form line where the federal AGI-derivative is adjusted to California's tax base. Workers who claim the federal § 225 deduction will see the adjustment flow through this schedule, computed off the federal return's Schedule 1-A. Payroll teams don't fill this out — it's the worker's return — but workers and their tax preparers will be asking what Box 12 code TT means relative to their California return throughout the 2027 filing season. Have a short FAQ ready.

The expectations gap is real. "No tax on overtime" was the marketing name; California-based hourly workers heard the headline. The reality is the smallest dollar benefit nationally and a state still taxing every overtime premium. Year-end communications should set the expectation clearly: federal benefit only, capped, and California specifically gives no state-level relief on top.

A worked walkthrough for an AGI-starting state: Virginia

Workers and payroll teams in AGI-starting states sometimes ask why "state didn't act on § 225" doesn't translate into a state-level benefit. A walkthrough of a Virginia worker's 2026 tax return shows the structural answer.

Suppose Maria, a Virginia FLSA-nonexempt warehouse associate, earns $25/hour and works 50 hours per week for 50 weeks (40 straight + 10 FLSA OT = 500 OT hours / year). Maria's 2026 federal return:

• Federal AGI (Form 1040 line 11b): wages including OT premium; the federal AGI reflects total earned wages without any § 225 reduction.
• Federal Schedule 1-A line 38: § 225 deduction = $25/hr × 0.5 × 500 hours = $6,250.
• Federal taxable income (Form 1040 line 15): federal AGI minus standard deduction minus Schedule 1-A line 13b ($6,250) = federal AGI minus $22,250 (standard + § 225).
• Federal tax saving from § 225: $6,250 × 22% marginal rate = ~$1,375.

Maria's 2026 Virginia return (Form 760):

• Virginia begins from federal AGI (Form 760 line 1). This is Form 1040 line 11b — the AGI computed WITHOUT subtracting § 225. The OBBB deduction is invisible to Virginia at this point.
• Virginia applies its own modifications (additions and subtractions per VA Schedule ADJ). None of them imports the federal § 225 amount as a Virginia subtraction.
• Virginia taxable income is computed from federal AGI minus Virginia standard deduction minus Virginia-specific subtractions.
• Virginia tax saving from federal § 225: $0. Maria pays Virginia state income tax on the full OT premium.

Whether HB 29 had addressed § 225 or not is mathematically irrelevant for Maria's Virginia return — Virginia's starting point on Form 760 line 1 (federal AGI) never reflected the § 225 deduction in the first place. HB 29's actual provisions — decoupling from § 168(k), § 168(n), § 174 / § 174A, § 163(j) — affect Virginia's tax base by adjusting how certain federal items flow into Virginia's AGI or get subtracted thereafter. § 225 doesn't need addressing because it doesn't touch Virginia's AGI base.

This is the structural fact most analyses elide: for AGI-starting states, "decoupling from § 225" is a communication act, not a tax-mechanics act. The same outcome — no Virginia state-level deduction — would obtain whether or not the legislature said anything.

What's NOT a § 225 issue

A surprising amount of confusion in industry press blurs § 225 with adjacent OBBBA provisions and adjacent payroll concerns. Common things treated as § 225 issues that aren't:

• State overtime premiums (CA daily 8h, AK daily 8h, NV below-$18 daily, CO daily 12h, WA agricultural daily, the 7th-consecutive-day premium in CA/KY). These are state-required overtime, not "required under section 7 of the FLSA." They never qualified federally under § 225(c)(1) regardless of which state the worker is in. See our overtime rules by state guide for the full state-overtime landscape.
• CBA premiums above the FLSA floor. Collective bargaining agreements that require 1.5× on hours over 8/day, 2× on Sundays, or 1.5× on holidays don't generate qualifying § 225 overtime unless those hours also happen to be FLSA-required weekly-40 overtime. The CBA premium portion is wages; not § 225-deductible.
• Exempt-employee policy "overtime." When an FLSA-exempt manager gets paid extra for working long hours, that's a discretionary bonus or policy payment — not FLSA-required overtime. Including it in Box 12 code TT is the most-likely-to-be-discovered § 6721 violation, since the employee's exempt status is flagged elsewhere on the W-2. The reverse trap (salaried workers who are NON-exempt and DO get § 225-qualifying overtime via the fluctuating workweek or fixed-workweek mechanic) is covered in our salaried non-exempt employees guide.
• Off-the-clock work that retroactively becomes FLSA overtime. When unrecorded work pushes a non-exempt employee past 40 hours in a workweek, the additional hours are FLSA-required overtime — and the 0.5× premium on those hours qualifies for § 225 once recorded. The cascade from off-the-clock discovery to corrected Box 12 code TT reporting is non-trivial; see our off-the-clock work by state guide for the federal "knew or should have known" standard and the cascading wage / recordkeeping implications.
• Federal tips deduction (§ 224). A separate OBBBA-created below-the-line federal deduction for qualified tips, with its own $25,000 cap and its own MAGI phase-out. § 224 and § 225 are parallel provisions; tipped workers can claim both. State conformity for § 224 follows similar — but not identical — patterns to § 225. (Some states have decoupled from one but not the other, e.g., Massachusetts HB 4975 addresses neither; Arizona EO 2025-15 covers both; New York's IT-225 has add-backs for both; Colorado specifically conforms to § 224 even though HB 25-1296 added back § 225.) For the § 224 federal mechanic + state-conformity table + 70+ Treasury Tipped Occupation Codes + Box 12 code TP + Box 14b TTOC reporting, see our no-tax-on-tips guide.
• Federal car-loan-interest deduction and the $6,000 senior deduction. Both are OBBBA-created federal provisions but unrelated to overtime. DC's Temporary Conformity Act decouples from all three (overtime, car-loan-interest, senior deduction) as a single package; Arizona's EO 2025-15 conforms to all three. These are not § 225 questions; they're OBBBA-broader-conformity questions.
• Federal withholding mid-year. The IRS did not update Circular E withholding tables for OBBBA. Employees see the § 225 benefit at federal tax-filing time, not on each paycheck. State withholding for the 4 passthrough states (OR/ID/ND/SC) similarly happens through the annual state filing, not through mid-year withholding-table changes. Workers expecting bigger paychecks "next pay period" are wrong about both federal and state mechanics.
• 2025 W-2 reporting (Box 14 vs Box 12 code TT). Tax year 2025 reporting was voluntary per IRS Notice 2025-69; 2026 reporting is mandatory in Box 12 code TT. State-conformity treatment doesn't change either reporting requirement. See the parent no-tax-on-overtime article for the full Box 12 mechanic. Underlying recordkeeping for the FLSA-premium portion is required regardless — federal 29 CFR § 516.2(a) plus state-by-state requirements per our recordkeeping requirements by state guide.

State-by-state table

State-level treatment of the federal § 225 overtime deduction for tax year 2026 (current as of May 2026). "Passthrough" = federal deduction reduces state taxable income; "No passthrough" = federal deduction does not reduce state taxable income; "Decoupled (FTI)" = state legislature affirmatively added back to prevent automatic passthrough; "Statement issued (AGI-starting)" = state has issued explicit non-conformity statement but no passthrough was structurally possible; "No state tax" = no wage income tax applies; "Pending" = state legislature has not finalized posture as of May 2026.

State-conformity status is current as of May 2026 and subject to change. Verify with your state DOR before relying on this table for material reporting decisions. The "No passthrough" entries for AGI-starting states are structurally guaranteed by the starting-point posture; the "Statement issued" entries reflect explicit state non-conformity statements that codify the same outcome.

Multi-state and remote workers

The federal § 225 deduction is identical regardless of the worker's state. A single federal return, a single Schedule 1-A, a single cap. State income-tax treatment depends on the worker's state of employment (subject to non-resident allocation, mobility, and reciprocity rules that vary state by state).

Three concrete scenarios:

• Texas-headquartered employer, California-remote worker. Worker gets the full federal § 225 deduction on their 1040. California state return (Form 540) excludes the deduction via SB 711's pre-OBBB conformity-date cutoff (and Schedule CA modifications). Net effect for the worker: federal benefit, no state benefit. Worker's expectations need managing; communicate proactively.
• California-headquartered employer, Oregon-resident telecommuter. Worker gets federal § 225 deduction. Oregon return passes through (SB 1507 retained the OT deduction); Oregon worker gets state-level benefit too. California has no state-tax-collection authority over an Oregon-resident worker doing remote work for a California employer (assuming Oregon-source income). Net effect: full federal + state benefit.
• DC-based employer with a Maryland-resident commuter. Worker gets federal deduction. DC's Temporary Conformity Act is legally contested (Congressional disapproval; AG opinion preserves the Act for 2025). Maryland is AGI-starting (no passthrough by default). Practical effect: full federal benefit; no DC or Maryland state-level deduction regardless of how DC's legal dispute resolves.

For payroll teams: Box 12 code TT reporting on the W-2 is identical regardless of work state. The asymmetry is purely on the state-return side and is the employee's compliance burden, not the employer's reporting burden. Document the worker's state of employment accurately on the W-2 (Box 15-20), make sure state withholding follows work-location rules, and let the employee's state return reconcile the rest.

Recent changes (2025-2026)

The state-by-state landscape moved substantially between January 2025 and May 2026. Federal events (IRS notices, Form W-2 finalization) are covered in the parent no-tax-on-overtime article. The chronology below captures the load-bearing state-level events.

• Late 2024 / early 2025 — Fixed-date conformity states pre-emptively decouple. Arizona, Georgia, Hawaii, Idaho, Kentucky, South Carolina, South Dakota, and West Virginia advance their conformity dates before OBBBA's enactment, effectively excluding OBBBA from their tax bases regardless of any future provision-specific legislation.
• May 16, 2025 — Colorado HB 25-1296 signed by Governor Polis. First explicit state legislative decoupling from the federal overtime deduction; pre-dates OBBB enactment by seven weeks. Section 6 amends CRS § 39-22-104 to add back federal overtime deduction to Colorado taxable income; effective tax year 2026.
• July 4, 2025 — OBBB signed (P.L. 119-21). Federal IRC § 225 takes effect retroactive to January 1, 2025.
• July 24, 2025 — Advance Colorado files TABOR-violation lawsuit in Denver District Court challenging HB 25-1296. Plaintiffs include Sen. Barbara Kirkmeyer (R-Brighton), former Senate president Kevin Grantham, and two El Paso County overtime-eligible employees. Statute remains in effect pending resolution.
• September 23, 2025 — Maine P.L. 2025, c. 336 takes effect. Authorizes Governor to direct State Tax Assessor on temporary conformity matters.
• October 1, 2025 — California SB 711 signed by Governor Newsom (Chapter 231 of 2025 Statutes); sets IRC conformity date to January 1, 2025. Same day, Maine Governor Mills issues Determination and Direction to the State Tax Assessor declining OBBBA conformity for "no tax on tips" and "no tax on overtime."
• November 3-4, 2025 — DC Council Chairman Mendelson introduces (November 3) and Council passes (November 4, emergency procedure) the Temporary Conformity Act, decoupling DC from OBBBA tips, overtime, car-loan-interest, and $6,000 senior deduction.
• November 21, 2025 — IRS Notice 2025-69 (federal 2025 transition relief).
• January 12, 2026 — IRS finalizes 2026 Form W-2 with Box 12 code TT.
• January 15, 2026 — Massachusetts Governor Healey introduces HB 4975 — proposed temporary delay on OBBBA conformity for §§ 174A / 163(j) / 168(n) / 179(b) / 1400Z. Bill does NOT address § 225.
• February 4 - 12 - 18, 2026 — Congressional disapproval of DC Temporary Conformity Act: House (February 4); Senate 49-47 (February 12); Presidential signature (February 18). H.J. Res. 142.
• February 12, 2026 — Massachusetts Joint Committee on Revenue holds hearing on HB 4975.
• February 20, 2026 — Virginia HB 29 signed by Governor Spanberger (Chapter 7 of 2026 Acts of Assembly); sets static conformity date to December 31, 2025; decouples from §§ 168(k) / 168(n) / 174 / 174A and modifies § 163(j); does NOT address § 225.
• February 24, 2026 — DC Attorney General Brian Schwalb issues formal legal opinion: Congressional disapproval resolution does not alter District taxpayers' 2025 tax liabilities; Temporary Conformity Act remains in effect.
• March 2026 — California FTB Tax News reaffirms non-conformity to OBBBA overtime and tips deductions.
• April 9, 2026 — Oregon SB 1507 signed by Governor Tina Kotek. Partially disconnects Oregon from OBBBA but explicitly RETAINS overtime and tips deductions. Oregon Legislative Revenue Office projects approximately $300 million net state revenue savings across 2025-2027 biennium.
• November 25, 2025 — Arizona Governor Hobbs issues Executive Order 2025-15 directing ADOR to add OBBBA deductions (overtime, tips, higher standard deduction, $6,000 senior, auto-loan-interest) to Form 140. No statutory basis; two prior conformity bills had been vetoed.
• May 11, 2026 — Georgia HB 463 ("Georgia Economic Growth and Tax Relief Act of 2026") signed by Governor Kemp. Lowers state income tax rate to 4.99%; creates state-level overtime + tip exclusions ($1,750 each) for tax years 2026-2028; the companion conformity bill HB 1199 advances Georgia's IRC date to January 1, 2026 with explicit § 224/§ 225 decoupling.
• Q1-Q2 2026 — State DOR conformity bulletins continue rolling out. Multiple state legislatures (Maryland, Wisconsin, others) consider OBBBA conformity in 2026 sessions.

If you discover you've been doing this wrong

Most of the state-conformity risk is forward-looking — tax-year 2026 W-2s (issued January 2027) are the first compliance event with mandatory Box 12 code TT, and 2026 is the first tax year where state-side add-backs apply for the explicit-decoupler states. But common configuration errors are already in flight.

1. You've been withholding state income tax on post-§-225 wages in a decoupler state. If your payroll system computes Illinois, California, or any other decoupler-state withholding from federal taxable income (which is post-§-225) instead of federal AGI (pre-§-225), workers are being under-withheld for state tax. They'll owe more at filing. Audit the payroll system's state-tax-base configuration before the next pay period.

2. You've been including state-only OT in Box 12 code TT. California daily 8-hour overtime, daily double-time, the 7th-consecutive-day premium; CBA premiums above the FLSA floor; exempt-employee policy "overtime" — none of these qualify federally and none belongs in Box 12 code TT. If your year-end 2025 W-2 (issued January 2026) included these amounts, the deduction your employees claimed on their 2025 federal return is inflated. Issue corrected W-2s (Form W-2c) before the IRS reconciliation finds the discrepancy. Each incorrect W-2 is a $310 § 6721 penalty exposure.

3. You've been treating "rolling-conformity state" as "passthrough state." Workers in AGI-starting rolling-conformity states (most of the country) get NO state-level § 225 benefit despite the rolling conformity. If your employee communications said "your state will follow the federal deduction" for workers in Indiana, Kansas, Missouri, or any other AGI-starting state, those communications are wrong. Re-issue with the corrected framing.

4. You haven't computed the Oregon / Idaho / North Dakota / South Carolina state-side deduction in your payroll system. These four states pass the federal deduction through to state taxable income. State withholding for FLSA-overtime hours should reflect the reduced state taxable income — workers will see slightly lower state withholding than a strict "all wages get state tax" computation would suggest. If your payroll system doesn't compute the state-side passthrough, workers will over-pay state withholding and get refunds at filing (or short-pay if the system over-corrects). Verify the state-tax engines for these four states specifically.

5. You assumed Massachusetts or Virginia "decoupled from § 225" based on industry headlines. Neither HB 4975 (MA) nor HB 29 (VA) addresses § 225. Both states are AGI-starting, so the no-passthrough outcome holds regardless — but if you've configured payroll on the assumption that an explicit § 225 add-back applies, you may have added unnecessary computation logic. The correct state-tax computation for both states starts from federal AGI (which is pre-§-225) and never imports the deduction.

6. You haven't subscribed to your state DOR bulletins. Idaho, North Dakota, South Carolina, Iowa, Michigan, Montana — and several others — may issue tax-year-2026 guidance through the year. Subscribe to each state's DOR newsletter; the rolling-conformity passthrough states are most likely to issue clarifying guidance.

How to configure payroll for tax year 2026

For each work-state in your employee master file, run the audit:

1. Confirm the state's tax-base starting point in your payroll system. Federal AGI for 31 states + DC; federal taxable income for 5 states (CO, ID, ND, OR, SC); own tax base for 5 states (AL, AR, MS, NJ, PA). If your system isn't explicit about which line of the federal 1040 it imports for each state, that's the highest-leverage configuration check.

2. Set the decoupler flag for explicit-non-conformity AGI-starting states. California, New York, Illinois, Maine, Hawaii, Connecticut, DC — payroll system should be configured to withhold state income tax based on the full overtime amount (pre-§-225), regardless of any rolling-conformity flag the system might have. Verify the flag is set per work-state.

3. Set the FTI-decoupler flag for Colorado specifically. CO is the only state where the passthrough was structurally possible and was decoupled by statute. The payroll system needs to compute Colorado state income tax on federal taxable income with the § 225 deduction added back. This is the most consequential configuration step for CO-based workers.

4. Set the FTI-passthrough flag for OR / ID / ND / SC. State withholding should be computed on the post-§-225 federal taxable income. Workers in these states get a state-level deduction matching the federal.

5. Configure Box 12 code TT correctly. Independent of state-conformity posture, Box 12 code TT is required for all 2026 W-2s issued January 2027. The amount is the FLSA-required 0.5× premium portion only — not the full 1.5× overtime check, and not state-only overtime (CA daily 8h, etc.). See the parent no-tax-on-overtime article for the full Box 12 mechanic.

6. Update employee communications by state grouping. Three audience groupings: decoupler-state workers (federal benefit only, no state-level deduction); passthrough-state workers (federal + state benefit); no-income-tax-state workers (federal benefit only, no state interaction to communicate). Don't write one global FAQ — tailor by work state.

7. Set a state-DOR watch. Massachusetts HB 4975, Maine LD 2010, the DC legal dispute, and several state DOR bulletins are pending as of May 2026. Posture may change mid-year. Subscribe to state DOR bulletins for every state you have workers in; re-audit before the 2026 filing season opens.

The through-line

"No tax on overtime" is the federal marketing name. State-level reality is one consequential statutory decoupling (Colorado HB 25-1296), four states where the federal deduction reduces state taxable income (Oregon, Idaho, North Dakota, South Carolina), seven AGI-starting jurisdictions that issued explicit non-conformity statements clarifying what their structural posture already implied (California, New York, Illinois, Maine, Hawaii, Connecticut, DC), and the rest of the country where § 225 has no automatic state-tax effect because the deduction never touches the AGI-starting tax base.

The mechanic that explains all of it is genuinely simple: § 225 reduces federal taxable income but not federal AGI. Most states start their tax base from federal AGI. Most states' "decoupling" from § 225 is reaffirmation of a structural default, not new legislation. The exception is Colorado — the one FTI-starting state that decoupled by statute (HB 25-1296 § 6, before OBBB was even enacted) — and Oregon, the one FTI-starting state that affirmatively retained the passthrough (SB 1507).

For payroll teams, the single highest-leverage move is configuring the state-tax-base starting point correctly for each work-state in the employee master file. The rest of the compliance work — Box 12 code TT, employee communications, recordkeeping — follows from accurate state classification.

Sources

Federal statute and IRS guidance

• 26 U.S.C. § 225 — Qualified overtime compensation (Cornell LII)
• 26 U.S.C. § 6051 — Receipts for employees (statutory basis for Box 12 code TT)
• 26 U.S.C. § 6721 — Information return penalty
• IRS — Questions and answers about the new deduction for qualified overtime compensation
• IRS Notice 2025-69 — 2025 transition relief (PDF)
• PayrollOrg — IRS releases 2026 Form W-2 with OBBBA changes

State conformity — FTI-starting states

• Colorado: Colorado General Assembly — HB 25-1296 bill page; HB 25-1296 Fiscal Note (PDF); Colorado DOR — State Income Tax Addback; Colorado DOR — DR 0104 booklet (PDF); PayrollOrg — Colorado's Response to OBBBA; Colorado Politics — Advance Colorado TABOR lawsuit
• Oregon: Oregon Capital Chronicle — Oregon will partially disconnect state tax code; Foster Garvey — Senate Bill 1507; Aldrich Advisors — Oregon Disconnect: SB 1507
• Idaho / North Dakota / South Carolina: ITEP — Linking to Tipped and Overtime Income Deductions; Tax1099 — OBBBA State Conformity Tracker

State conformity — AGI-starting states with explicit non-conformity statements

• California: California SB 711 — official bill page; FTB Tax News November 2025; FTB Tax News March 2026; FTB Summary of Federal Income Tax Changes; Grant Thornton — California conformity date update; EY — California law largely does not conform to OBBBA
• New York: NY Department of Taxation and Finance — IT-225 instructions; Thomson Reuters — Which states are decoupling
• Illinois: LIFT HCM — 2026 Illinois Payroll Tax Changes; University of Illinois Tax School — OBBBA Update
• Maine: Pierce Atwood — Maine Governor Mills OBBBA Conformity Directions; Maine Revenue Services Tax Alert October 2025 (PDF); Maine Revenue Services Report on 2025 Conformity (PDF); Albin, Randall and Bennett — State Conformity to OBBBA: ME / MA / NH
• Hawaii / Connecticut: Thomson Reuters — State decoupling tracker; Tax Foundation — Big Beautiful Bill State Tax Impact
• District of Columbia: DC Council — Temporary Conformity Act release; BDO — DC Takes Emergency Action; ArentFox Schiff — DC's Tax Decoupling Dispute; Eversheds Sutherland — Congress repeals DC's OBBB Decoupling Act; Tax Notes — D.C. Tax Decoupling Remains in Effect for 2025

State conformity — AGI-starting states with OBBBA decoupling bills that don't address § 225

• Massachusetts: Massachusetts Office of the Comptroller — No-Tax Overtime announcement; EY Tax News — Proposed MA bill would delay conformity to OBBBA; LGA — Understanding HB 4975 Proposed Changes; Mass Budget and Policy Center — OB3 Tax Changes to Decouple From; Tax Notes — Massachusetts Governor's Bill
• Virginia: Forvis Mazars — Virginia Updates Tax Law in Response to OBBBA; Virginia DHRM HR Highlights January 2026 (PDF); Baker Tilly — Virginia's budget legislation tax changes; Carry — Virginia Reverts to Static Tax Conformity; Keiter — 2025 Virginia Tax Conformity Considerations

Cross-cutting analysis

• Tax Policy Center — How do state individual income taxes conform with federal income taxes?
• ITEP — How Does Federal-State Tax Conformity Work?
• ITEP — Linking to Tipped and Overtime Income Deductions Would Worsen State Shortfalls
• Tax Foundation — Big Beautiful Bill State Tax Impact: Implications for Conformity
• Tax Notes — State Responses to Conformity Issues Under OBBBA
• Thomson Reuters — How states are implementing OBBBA tax law changes
• Tax1099 — OBBBA State Tax Conformity Tracker