There is no tax on overtime in South Carolina at the state level. South Carolina has not adopted the new federal overtime deduction created by the One Big Beautiful Bill Act, so your overtime pay remains fully taxable on your state return even if you claim the federal deduction. In fact, if you take the federal deduction, you have to add that amount back when you file your SC1040.1South Carolina Department of Revenue. SC Information Letter 26-4 (Revised)
Why South Carolina Still Taxes Your Overtime
South Carolina ties its income tax to the federal Internal Revenue Code as it existed on December 31, 2024. New federal tax changes don’t flow through automatically.2South Carolina Legislature. South Carolina Code 12-6 – South Carolina Income Tax Act The federal overtime deduction was signed into law on July 4, 2025, after that conformity date, so it has no effect in South Carolina unless and until the legislature acts.
The South Carolina Department of Revenue confirmed this in Information Letter 26-4. The state has not conformed to the overtime deduction or several other provisions of the One Big Beautiful Bill Act, and taxpayers who claim the federal deduction must add the full amount back on their South Carolina return.1South Carolina Department of Revenue. SC Information Letter 26-4 (Revised) Your overtime pay stays fully taxable at state rates, which currently top out at a marginal rate of roughly 6.3% on taxable income above $18,220.
The Add-Back on Your SC1040
Your South Carolina return starts with your federal adjusted gross income, which already reflects any federal overtime deduction you claimed. Because the state doesn’t recognize the deduction, you add the overtime amount back on Line 1e of the SC1040.1South Carolina Department of Revenue. SC Information Letter 26-4 (Revised) Tax preparation software should handle it automatically once you’ve entered the federal deduction.
Skipping this step is where filers get into trouble. If you claim the federal deduction but don’t add it back, you’ve understated your South Carolina taxable income. The state treats that as a potential underpayment, with negligent-underpayment penalties starting at 5% of the underpaid amount plus interest. Claiming the federal benefit does not excuse the state adjustment.
What the Federal Deduction Actually Covers
Knowing what you’re adding back helps you get the number right. The federal deduction under 26 U.S.C. ยง 225 is available for tax years 2025 through 2028 and covers only the premium portion of overtime pay, not the full amount you earn during overtime hours.3Internal Revenue Service. One, Big, Beautiful Bill Provisions – Individuals and Workers If you earn time-and-a-half, the “half” above your regular rate is deductible; the base rate for those hours is still fully taxable federally.4Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
If your employer pays more than federal law requires, such as double-time, only the legally mandated half-time premium qualifies. The extra amount above time-and-a-half isn’t deductible.4Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
The deduction is capped and phases out at higher incomes:
- Annual limit of $12,500 per return, or $25,000 for married couples filing jointly.
- Phase-out begins at modified adjusted gross income above $150,000 single or $300,000 joint, and the deduction can reach zero as income rises further.
- Not available at all if you are married and file separately.3Internal Revenue Service. One, Big, Beautiful Bill Provisions – Individuals and Workers
Who Qualifies in the First Place
Only overtime required under Section 7 of the Fair Labor Standards Act counts. You have to be a non-exempt worker legally entitled to overtime pay for hours worked beyond 40 in a workweek.4Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation Most hourly employees qualify. Salaried workers in executive, administrative, or professional roles typically do not.5U.S. Department of Labor. Overtime Pay
Voluntary extra pay for long hours doesn’t count if you aren’t legally entitled to FLSA overtime. The deduction follows the legal requirement, not how your employer labels the pay. Salaried workers who receive “overtime bonuses” outside FLSA protections often learn this the hard way.
Payroll Taxes and Withholding Don’t Change
The federal deduction doesn’t touch payroll taxes. Social Security tax (6.2%) and Medicare tax (1.45%) still apply to every dollar of overtime compensation. The deduction affects only federal income tax when you file your annual return.3Internal Revenue Service. One, Big, Beautiful Bill Provisions – Individuals and Workers
Your paycheck probably won’t look different during the year either. The deduction is claimed annually, not applied to withholding at the time you earn the pay. Some employers may adjust withholding voluntarily, but the law doesn’t require it.
Records to Keep for Both Returns
You need to know the exact amount of qualified overtime compensation you earned. For tax year 2025, employers were not required to separately report overtime premiums on W-2 forms because the law was enacted midyear, and workers had to use reasonable methods to calculate their own qualified amount from pay stubs and other records.6Internal Revenue Service. Internal Revenue Bulletin 2025-50
Starting with tax year 2026, employers are expected to report your total qualified overtime compensation in Box 12 of your W-2 using new code TT. Until then, hold on to your own pay stubs so you can verify the figure. For South Carolina purposes, you need the same documentation to calculate the add-back accurately: if you claimed $8,000 in qualified overtime federally, that same $8,000 goes back on the state return.
Bills That Could Change This in South Carolina
Several bills to create a state-level overtime exemption have been introduced, but none had passed as of early 2026. House Bill 3298 would add Section 12-6-1230 to the state code and make all overtime income of an individual taxpayer exempt from state income tax. Unlike the federal deduction, which covers only the premium portion, this bill would exempt the full amount earned during overtime hours.7South Carolina Legislature. 2025-2026 Bill 3298 – Overtime Income Tax Exemption
House Bill 3793 takes a similar approach, also proposing a new Section 12-6-1230. It was referred to the House Ways and Means Committee in January 2025 and had sponsors added as recently as February 2026, suggesting continuing interest but no floor vote yet. The legislature could also take a different route and simply update its IRC conformity date to pick up the federal deduction as-is. The Department of Revenue has said it will issue updated guidance once the legislature acts.1South Carolina Department of Revenue. SC Information Letter 26-4 (Revised)
The two paths would produce very different results. The pending bills contain no income caps, no phase-outs, and no dollar limit, and they would exempt all overtime income rather than just the premium. A simple conformity update would adopt the narrower federal version instead. Before you file your state return, check dor.sc.gov for updated guidance in case the rules change.