Arizona does tax overtime pay, and it taxes it at the same flat 2.5% rate it applies to every other dollar of earned income. The state makes no distinction between a regular hour and an overtime hour. One change worth knowing about: a federal deduction signed into law in July 2025 lets many workers write off the premium portion of their overtime for tax years 2025 through 2028, and because Arizona’s tax calculation starts from your federal adjusted gross income, that federal break can carry through to your state return as well.
Why Overtime Is Taxed at the Same Rate as Regular Pay
Arizona doesn’t write its own definition of taxable income. Under ARS 43-1001, Arizona gross income is your federal adjusted gross income for the year. 1Arizona Legislature. Arizona Code 43-1001 – Definitions The Arizona Department of Revenue has confirmed that “federal adjusted gross income [is] the starting point for calculating Arizona income tax.” 2Arizona Department of Revenue. ADOR Outlines Executive Order and 2025 Tax Year Income Tax Forms
Federal AGI lumps your base wages, commissions, tips, bonuses, and overtime into a single number. There’s no separate line for overtime hours. Arizona inherits that number and taxes it all together.
Since the 2023 tax year, Arizona has used a single flat rate of 2.5% on taxable income. 3Arizona Legislature. Arizona Code 43-1011 – Taxes and Tax Rates That eliminates one worry overtime workers have in other states: bracket creep. A string of 50-hour weeks can’t push your Arizona income into a higher bracket, because there are no higher brackets. Your 41st hour is taxed at the same 2.5% as your first.
The New Federal Overtime Deduction (2025–2028)
The One, Big, Beautiful Bill Act, signed July 4, 2025, created a federal deduction for overtime pay that runs through the 2028 tax year. 4Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors The deduction covers the premium portion of overtime, meaning the extra half-time piece of time-and-a-half pay that the Fair Labor Standards Act requires for hours over 40 in a workweek.
The limits that matter:
- Annual cap of $12,500 for most filers, or $25,000 for married couples filing jointly.
- The deduction phases out once modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).
- Only FLSA-required overtime qualifies. Voluntary extra pay that isn’t legally mandated doesn’t count.
- Your employer must report the qualified overtime amount on your W-2 or 1099.
- Both itemizers and non-itemizers can claim it. A Social Security number is required, and married taxpayers must file jointly.
How It Flows Through to Your Arizona Return
Because Arizona starts with federal AGI, a federal deduction that lowers your AGI also lowers the number Arizona taxes. 1Arizona Legislature. Arizona Code 43-1001 – Definitions A $5,000 federal overtime deduction would shave another $125 off your Arizona bill at the 2.5% rate. The IRS is still issuing guidance on how the deduction is implemented, so confirm the treatment with the Arizona Department of Revenue when you file.
What the Deduction Doesn’t Do
It doesn’t eliminate payroll taxes. Social Security, Medicare, and federal income tax withholding still come out of every overtime check. 4Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors The savings show up when you file, not on your pay stub.
What Comes Out of Your Overtime Paycheck
Arizona handles state withholding differently from most states. Instead of a formula tied to income brackets, you pick a flat percentage on Form A-4. 5Arizona Department of Revenue. Arizona Form A-4 – Employee’s Arizona Withholding Election The 2026 form offers seven choices: 0.5%, 1.0%, 1.5%, 2.0%, 2.5%, 3.0%, and 3.5% of gross taxable wages. If you never turn one in, your employer withholds at the 2.0% default.
When you work overtime, your gross pay for the period is higher, so the dollar amount withheld rises even though the percentage stays flat. A worker who elected 2.5% withholding on a $1,200 regular check sees $30 withheld. If overtime bumps that check to $1,700, the withholding goes to $42.50. There’s no separate state overtime withholding rate.
What You Actually Owe When You File
Your real Arizona bill isn’t settled until your annual return. The state’s standard deduction, set out in ARS 43-1041, shields a chunk of income from the 2.5% rate and is adjusted each year for inflation. 6Arizona Legislature. Arizona Code 43-1041 – Optional Standard Deduction For 2025, the standard deduction is $15,750 for single filers, $23,625 for head of household, and $31,500 for married couples filing jointly. 7Arizona Department of Revenue. Individual Income Tax Information The 2026 figures will be slightly higher.
Take a single filer who earned $55,000 in total wages, including $8,000 in overtime. Subtract the 2025 standard deduction of $15,750 and Arizona taxable income is $39,250. At 2.5%, the state bill comes to about $981. If the federal overtime deduction reduces AGI, that $39,250 drops further. Any state tax withheld beyond what you owe gets refunded.
Adding Federal Taxes to the Picture
State income tax is one slice. Federal payroll taxes hit overtime wages the same as regular ones. Social Security is 6.2% on earnings up to the wage base limit, which is $184,500 for 2026. 8Social Security Administration. Contribution and Benefit Base Medicare is 1.45% with no cap, and an additional 0.9% Medicare surtax applies on earnings above $200,000 for single filers.
Combine federal income tax, FICA, and Arizona’s 2.5%, and the full marginal bite on an overtime dollar runs well above any single line. For someone in the 22% federal bracket, the combined marginal rate is roughly 32% before deductions. The new federal overtime deduction offsets part of that, but it’s worth running the full math before counting on a particular take-home figure.
If Your Employer Owes You Overtime
Taxes assume you were actually paid. If you weren’t, the state’s unpaid wage claim process won’t help with overtime: the Industrial Commission of Arizona’s wage claim system specifically excludes it. 9Industrial Commission of Arizona. Unpaid Wage Claim Form Overtime claims go to the U.S. Department of Labor’s Wage and Hour Division, which enforces the FLSA requirement of one and a half times your regular rate for hours past 40 in a workweek. 10Office of the Law Revision Counsel. 29 U.S. Code 207 – Maximum Hours