Does "No Tax on Overtime" Lower State Taxes?

When the federal deduction lowers your state taxes (and where it doesn't)

The federal "no tax on overtime" deduction (capped at $12,500 per person and ends in 2028) reduces federal income tax on the extra half of overtime pay. It also reduces state income tax in just 4 states: Oregon, Idaho, North Dakota, and South Carolina. Everywhere else, your employees still owe state tax on the full overtime check.

It's not that 46 states ignored the federal deduction. Most never had a way for it to lower state taxes — state income tax usually starts from a federal income number that doesn't include the no-tax-on-overtime deduction at all. Only 4 states use the federal number that does.

What to tell employees about state tax

• List employees by their state of residence (where they file state tax).
• If anyone's in OR, ID, ND, or SC: federal deduction lowers state tax too.
• Everywhere else: tell employees federal deduction applies; state tax doesn't change.
• Box 12 code TT reporting is the same in every state — federal only.
• Watch your state's tax-department updates through 2026 — some are still issuing guidance.

Where the state-by-state confusion catches employers

• Telling employees they'll see lower state tax in California — California completely opted out.
• Assuming Oregon and Colorado treat it the same — Oregon honors the federal deduction; Colorado doesn't.
• Communicating "no tax on overtime" as if federal and state both apply — only federal does in 46 states.
• Confusing Box 12 code TT reporting with state taxes — they're independent.

Assume federal doesn't lower state taxes

For 46 of 50 states, the federal "no tax on overtime" deduction doesn't reduce state income tax. If you're not in Oregon, Idaho, North Dakota, or South Carolina, tell employees the federal deduction is the whole benefit. Box 12 code TT reporting is the same everywhere.