Does No Tax on Overtime Apply to NYC Workers?

If you work in New York City and heard that overtime is now tax-free, the short answer is that it isn’t. The “no tax on overtime NYC” headline refers to a new federal income tax deduction that covers only the premium half of your overtime pay, caps out at $12,500 a year, and does nothing to your New York State or New York City tax bill. Albany has not adopted the federal break, so state and city income taxes still apply to every dollar of overtime you earn.

What the Federal Deduction Actually Covers

The One Big Beautiful Bill Act, signed into law on July 4, 2025, created a new deduction under Internal Revenue Code Section 225 for “qualified overtime compensation,” available for tax years 2025 through 2028.¹ It is temporary relief, not a permanent change.

The deduction does not shelter your whole overtime paycheck. It covers only the premium portion — the extra amount above your regular hourly rate. If you make $30 an hour and get $45 an hour for overtime, only the extra $15 per hour counts.² Ten overtime hours in a week at that rate produce $150 of deductible premium, not $450 of deductible pay.

Caps and Income Limits

You can deduct up to $12,500 in qualified overtime compensation per return, or $25,000 for joint filers.¹ Because only the premium half counts toward that cap, you would need a very large volume of overtime hours to hit it.

The deduction phases out once your modified adjusted gross income passes $150,000 for single filers or $300,000 for joint filers, shrinking by $100 for every $1,000 above those thresholds. It disappears entirely at $275,000 single or $550,000 joint. Married workers must file jointly to claim it at all.³

Who Qualifies

The deduction is tied to the Fair Labor Standards Act. Only workers who are non-exempt under the FLSA — generally hourly employees legally entitled to time-and-a-half past 40 hours in a workweek — can claim it.⁴ 5 Salaried workers classified as exempt under the executive, administrative, or professional exemptions are out, even if their employer voluntarily pays extra for long weeks. The FLSA salary threshold for the exemption currently sits at $684 per week, or $35,568 annually.⁶ Construction, healthcare, retail, food service, and manufacturing workers tend to benefit most because they are typically non-exempt and work significant overtime.

Why Your NYC and State Taxes Don’t Change

New York starts its state tax calculation from your federal adjusted gross income, then applies its own modifications.⁷ It is a static conformity state, so new federal deductions do not flow through automatically. When you claim the IRC Section 225 overtime deduction federally, New York requires you to add that amount back when figuring your state taxable income.

The practical result for a city resident: the federal deduction lowers your federal tax, but your New York State and New York City income tax bills look exactly the same as if the deduction never existed. The entire overtime check, regular-rate portion and premium alike, is fully taxable at the state and city level.

What the Combined Tax Hit Looks Like

NYC residents pay income tax to three governments on overtime: federal, state, and city. New York City’s personal income tax runs through four brackets, topping out at 3.876% on income above $50,000.⁸ State rates start at 3.90% and climb from there; most full-time NYC workers earning overtime see a marginal state rate between 5.40% and 7.53%, depending on total income.⁹

Overtime stacks on top of your regular wages and is taxed at whatever marginal rate your total income falls into. A worker whose base pay sits in the 5.40% state bracket can see overtime hours taxed at 5.90% or more as those extra hours push total earnings into the next bracket. Add federal and city tax on top, and the effective marginal rate on overtime can easily exceed 30% for a middle-income NYC resident.

Payroll Taxes Still Apply to Every Dollar

Neither the federal deduction nor any proposed state bill touches payroll taxes. Social Security tax applies at 6.2% on earnings up to $184,500 in 2026.¹⁰ Medicare tax applies at 1.45% on all earnings, with an additional 0.9% Medicare surtax on earnings above $200,000 for single filers. All of your overtime counts toward each of these.

The State Bill That Would Change This

Senate Bill S3914A would amend New York Tax Law Section 612 to let workers subtract overtime compensation from their New York adjusted gross income.¹¹ As drafted, the bill contains no dollar cap and no income phase-out, and it would exempt all overtime compensation from state tax, not just the premium half. A companion bill, A8965, was introduced in the Assembly.

It has not passed. The bill was voted down 3–4 in the Senate Budget and Revenue Committee, then amended and recommitted to the same committee. If enacted, it would apply to taxable years beginning on or after January 1, 2026.¹¹ Until something passes in Albany, the federal deduction is the only overtime tax relief available to NYC workers, and it leaves state and city taxes untouched.

How and When You See the Savings

You will not see the federal deduction in your weekly paycheck. Employers can withhold federal tax on overtime using a flat 22% supplemental wage rate or combine it with regular pay and withhold at standard rates.¹² Either way, withholding happens up front. You claim the Section 225 deduction when you file your annual return, and any over-withholding comes back as a refund. Take-home pay on an overtime check will not look much different week to week; the savings arrive at filing time.

For tax year 2025, employers were not required to break out qualified overtime compensation on your W-2. Some used Box 14 voluntarily; many did not. Starting with tax year 2026, the IRS is updating Forms W-2, 1099-NEC, and 1099-MISC to include dedicated fields for qualified overtime compensation, which should make the deduction easier to claim.¹³ If your 2025 W-2 did not list the premium separately, you will need to work from your pay stubs or payroll records to calculate it. You must include your Social Security number on the return to claim the deduction, and married taxpayers must file jointly.³

A Realistic Picture for 2026

Say you earn $30 an hour and work 10 hours of overtime a week for 50 weeks. Your overtime premium totals $7,500 for the year. At a 22% federal rate, the Section 225 deduction saves you roughly $1,650 on your federal return. Your New York State and New York City income taxes on that same $7,500 of premium, plus the regular-rate portion of your overtime pay, remain fully in place. Social Security and Medicare taxes come out of the full amount as well. The federal break is real, but it is partial, it arrives at filing rather than in your paycheck, and in New York City it stops at the federal line.

1
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
2
Office of the New York State Comptroller. State Agencies Bulletin No. 2409 – Reporting of Premium Overtime Earnings
3
Internal Revenue Service. Notice 25-69 – Guidance for Qualified Tips and Overtime Compensation
4
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
5
U.S. Department of Labor. Wages and the Fair Labor Standards Act
6
U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemptions
7
New York State Senate. New York Tax Law 612 – New York Adjusted Gross Income of a Resident Individual
8
Office of the New York City Comptroller. The NYC Personal Income Tax Before and After the Pandemic
9
New York State Department of Taxation and Finance. New York State Withholding Tax Tables and Methods
10
Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security?
11
New York State Senate. Senate Bill S3914A
12
Internal Revenue Service. Publication 15 – Employer’s Tax Guide
13
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation