No Tax on Overtime in Illinois: Federal Deduction vs. State Tax

There is no tax on overtime in Illinois at the federal level for many workers starting with tax year 2025, but Illinois itself still taxes every dollar of overtime at its flat 4.95 percent income tax rate. The federal break comes from the One Big Beautiful Bill Act, signed July 4, 2025, which created a temporary deduction covering tax years 2025 through 2028 and capping at $12,500 for single filers and $25,000 for joint filers.¹ Illinois has not matched it. If you work overtime here, expect federal relief and no state relief.

What the Federal Deduction Actually Covers

The deduction is above-the-line, so you can claim it whether you itemize or take the standard deduction.¹ It does not exempt your whole overtime paycheck. Only the premium portion qualifies. If you earn time-and-a-half, only the “half” counts. Your regular hourly base for those overtime hours is still fully taxable. If your employer pays double time, only the half that satisfies the federal Fair Labor Standards Act requirement is deductible.²

The dollar caps are $12,500 for single filers and $25,000 for married couples filing jointly. The deduction begins phasing out once modified adjusted gross income exceeds $150,000 single or $300,000 joint.³ Workers with heavy overtime and moderate incomes benefit most. Higher earners see the deduction shrink or disappear.

Who Qualifies

The deduction is tied to overtime that the FLSA requires, which means you must be an FLSA non-exempt employee. Most salaried managers, professionals, and administrative employees paid above certain thresholds are exempt under the FLSA and do not earn “qualified overtime compensation” even when they work past 40 hours in a week.² Your title alone doesn’t decide it; duties, occupation, and earnings do.

Overtime pay owed only under a union contract or a voluntary employer policy, rather than the FLSA itself, doesn’t qualify. Only the portion the FLSA actually mandates counts.² Self-employed workers and independent contractors generally fall outside the FLSA framework and outside this deduction. It’s built for W-2 employees whose employers must pay federal overtime premiums.⁴

How to Claim It

Starting with 2026 W-2 forms, your employer must report your qualified overtime compensation separately using Code TT in Box 12.¹ That figure, subject to the caps and phase-outs, is the amount you can deduct. Claim it on your Form 1040 as an adjustment to income. Because it reduces AGI before the standard-versus-itemized choice, it stacks on top of whichever route you take.

Withholding is a separate issue. The OBBBA does not require employers to reduce federal withholding on overtime paychecks automatically. If you want the deduction to show up in your take-home pay through the year instead of arriving as a refund, submit an updated Form W-4 to your employer.³

Illinois Still Taxes Every Dollar of Overtime

Illinois imposes a flat 4.95 percent income tax on all net income and makes no distinction between regular wages and overtime.⁵ Time-and-a-half, double time, holiday premiums: all of it lands on your state return at the same rate. The Illinois Income Tax Act contains no overtime deduction or exemption.

Illinois starts from your federal adjusted gross income and then applies the additions and subtractions listed on Schedule M.⁶ Only items specifically listed on that schedule can be subtracted. Illinois has indicated the federal OBBBA overtime deduction must be added back when computing state income. Your federal bill drops; your Illinois bill on the same overtime does not.

State lawmakers have floated a change. House Bill 4216 would have amended the Illinois Income Tax Act to allow a deduction for overtime income. It stalled in the General Assembly and has not become law. Until something new passes, the 4.95 percent rate applies to your full overtime earnings.⁵

Social Security and Medicare Still Apply

The federal deduction covers income tax only. Social Security tax at 6.2 percent and Medicare tax at 1.45 percent still come out of every overtime dollar. Your employer withholds these payroll taxes on overtime the same way it always has, and the OBBBA doesn’t change that.³ Earnings above the Social Security wage base of $176,100 for 2026 stop being subject to the 6.2 percent portion, but Medicare has no cap.⁷

Why Your Overtime Check Looks Over-Taxed

Even with the new deduction, overtime paychecks often feel disproportionately taxed. The reason is payroll withholding software, not the underlying tax rate. When you work a heavy overtime week, the system annualizes that paycheck as if you earned that amount every pay period. That temporary assumption pushes the withholding calculation into a higher bracket for that single check.

Your actual federal tax is settled once a year on your return. If withholding ran high, you get the difference back as a refund. Because employers are not required to lower withholding on overtime under the OBBBA, you may see the full benefit of the deduction only at filing time unless you update your W-4. Illinois withholding, by contrast, is straightforward: every dollar comes out at the same 4.95 percent regardless of paycheck size.⁵

1
Internal Revenue Service. One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
2
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
3
Internal Revenue Service. One Big Beautiful Bill: How to Take Advantage of No Tax on Tips and Overtime
4
Illinois Department of Labor. Minimum Wage/Overtime FAQ
5
Illinois General Assembly. Illinois Compiled Statutes 35 ILCS 5/201 – Tax Imposed
6
Illinois Department of Revenue. Additions/Subtractions for Individual Income Tax
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026