There is no “no tax on overtime” law in California. Overtime pay is still fully subject to California state income tax under Revenue and Taxation Code Section 17041, with no exemption or exclusion.1California Legislative Information. Revenue and Taxation Code 17041 – Imposition of Tax What changed in 2025 is federal: a new deduction lets eligible workers subtract up to $12,500 of qualified overtime pay from their federal taxable income through the 2028 tax year. California has not adopted a matching break, so your state return treats overtime the same as any other wages.
What the Federal Deduction Actually Does
Internal Revenue Code Section 225, added by the One Big Beautiful Bill Act, is a deduction, not a full exemption. Eligible workers can deduct up to $12,500 of qualified overtime compensation per year ($25,000 on a joint return) for tax years 2025 through 2028.2Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation The deduction lowers the income figure the IRS uses to calculate what you owe. It does not eliminate tax on overtime.
It also phases out. Once your modified adjusted gross income passes $150,000 (single) or $300,000 (joint), the deduction shrinks by $100 for every $1,000 above the threshold.2Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation A single filer earning $275,000 or more gets nothing. Married taxpayers have to file jointly to claim it, and a valid Social Security number is required on the return.
The deduction is claimed on your annual return, not through reduced paycheck withholding. Starting with the 2026 tax year, employers must separately report your qualified overtime compensation on your W-2, which should simplify claiming the deduction.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Only Federal Overtime Hours Count
This is where California workers get caught off guard. “Qualified overtime compensation” means only the overtime required by Section 7 of the Fair Labor Standards Act, and only the premium portion. If you earn time-and-a-half for an overtime hour, the deductible amount is just the extra half, not the full hour-and-a-half.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
The FLSA triggers overtime after 40 hours in a workweek. California law is broader. It requires overtime after eight hours in a single workday, double time after twelve, and overtime on the seventh consecutive workday, even if you never hit 40 hours that week.4Department of Industrial Relations. Overtime The federal deduction does not cover California-only daily or seventh-day overtime.
Say you work four ten-hour days for 40 total hours in a week. Your employer owes you two hours of daily overtime each day under state law, but the FLSA sees 40 hours and no overtime. Those premium payments do not qualify for the federal deduction.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation Double-time pay is also capped for deduction purposes at what the FLSA would have required, and tips earned during overtime hours do not count.
Workers who consistently exceed 40 hours in a week get the most from the deduction. Workers who log long daily shifts but stay near 40 weekly hours get very little.
Who Qualifies
You have to be a non-exempt employee under the FLSA. That generally means hourly workers and salaried employees earning below the federal salary threshold of $684 per week. Workers classified as FLSA-exempt cannot claim the deduction, even if they receive overtime under a union contract or state law.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
California uses its own, higher salary threshold for exempt status: $70,304 per year, based on double the state minimum wage of $16.90 per hour.5Department of Industrial Relations. California Minimum Wage Set to Increase to $16.90 per Hour You can be non-exempt under state law but exempt under the FLSA. Only your FLSA status matters for the federal deduction.
California Treats Overtime as Ordinary Wages
Nothing about the federal change affects your California return. Section 17041 imposes tax on the entire taxable income of every resident, and the statute contains no carve-out for overtime.1California Legislative Information. Revenue and Taxation Code 17041 – Imposition of Tax The Franchise Tax Board treats overtime earnings the same as regular wages. Every dollar of overtime premium counts toward your California adjusted gross income, and California’s graduated rates from 1% to 13.3% apply as they would to any wage income.
So even if your federal return shows a $12,500 overtime deduction, your California return does not. You add that amount back when calculating state taxable income.
Pending California Legislation: AB 1550
State lawmakers have introduced legislation to align California with the federal break. Assembly Bill 1550, authored by Assemblymember Sanchez, would allow California taxpayers to deduct qualified overtime compensation on their state return using the same $12,500 and $25,000 caps and the same income phase-out. The deduction would be available on top of the standard deduction, so itemizing would not be required. AB 1550 would also drop the Social Security number requirement, potentially opening the deduction to ITIN filers.6Franchise Tax Board. Bill Analysis, AB 1550 – Qualified Tips and Overtime Compensation
As of mid-2026, AB 1550 is on suspense in the Assembly Revenue and Taxation Committee and has not been enacted.7California State Assembly. AB 1550 – Assembly Bill Policy Committee Analysis Until it or a similar bill passes, California continues to tax overtime in full.
Payroll Taxes and Your Paycheck
Payroll taxes hit every dollar of overtime with no exception. Social Security tax is 6.2% on earnings up to $184,500 in 2026.8Social Security Administration. Contribution and Benefit Base Medicare is 1.45% with no cap, plus an additional 0.9% once your wages exceed $200,000 in a calendar year.9Internal Revenue Service. Social Security and Medicare Withholding Rates The federal overtime deduction does nothing to reduce these.
Your paycheck will not get bigger under the new federal law either. The deduction is claimed at tax time, so employers keep withholding on overtime the way they always have: the flat supplemental rate of 22% federal and 6.6% California state, or the aggregate method that adds overtime to your regular wages and withholds as if that were a normal paycheck.10Employment Development Department. Personal Income Tax Withholding – Supplemental Wage Payments Any federal savings show up when you file, not in your check.