There is no tax on overtime in Indiana at the state level in the sense many workers hope for: Indiana taxes every dollar of overtime pay at its flat state rate, and your county piles its own income tax on top. What changed in 2025 is federal. A new law lets qualifying workers deduct the premium portion of their overtime from federal income, and because Indiana starts its own tax calculation from your federal adjusted gross income, that federal deduction quietly lowers your Indiana bill too.
What the Federal Overtime Deduction Covers
The One, Big, Beautiful Bill Act, signed on July 4, 2025, created a federal deduction for overtime pay that runs for tax years 2025 through 2028.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors Only the premium portion qualifies, not the base wage for those hours. If you earn $25 an hour and your overtime rate is $37.50, the deductible amount is the extra $12.50 per hour.
The limits:
- Annual cap of $12,500 for single filers, $25,000 for married couples filing jointly.
- Phase-out for modified adjusted gross income above $150,000 (or $300,000 joint).
- The overtime must be required under the Fair Labor Standards Act and reported on a W-2 or 1099.
- Married taxpayers must file jointly to claim it.
Both itemizers and non-itemizers can take the deduction. Employers are now required to report qualified overtime compensation separately on your W-2 or other tax statement, so the deductible number should be visible at tax time.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
Who Qualifies
The deduction reaches only overtime an employer is legally required to pay under the FLSA, meaning hours over 40 in a workweek at no less than one and a half times the regular rate.2U.S. Department of Labor. Overtime Pay If you’re classified as exempt because you’re a salaried executive, administrator, or professional earning above the federal salary threshold of $35,568 per year, your employer isn’t required to pay you overtime, and any extra pay you receive doesn’t qualify.
Workers whose employers pay overtime rates voluntarily, without an FLSA requirement, fall outside the deduction. So do independent contractors who don’t receive a W-2.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
How the Federal Deduction Affects Your Indiana Tax
Indiana calculates state tax starting from your federal adjusted gross income. Because the new deduction reduces federal AGI, it should also reduce the income Indiana taxes. Within the caps and phase-out described above, the same deduction shrinks both federal and state liability. This is the closest thing to a “no tax on overtime” break Indiana workers get, and it comes entirely from federal law.
Indiana State and County Tax Still Apply
Indiana has no state-level exemption for overtime earnings. Every dollar is subject to the flat state income tax, which is 2.95% for the 2026 tax year and scheduled to drop to 2.90% in 2027.3Indiana Department of Revenue. Rates, Fees and Penalties The premium portion of overtime isn’t taxed at a higher percentage; it’s the same flat rate as the rest of your paycheck.4Indiana General Assembly. Indiana Code 6-3-2-1 – Imposition of Tax; Tax Rate; Calculation
Then there’s the county. Indiana counties levy their own income taxes on the same AGI base, so overtime is fully subject to them. Your county rate is set by where you lived on January 1 of the tax year. Rates currently range from roughly 1% to about 2.75%.5Justia. Indiana Code 6-3.6 – Local Income Taxes Combined with the state rate, most Indiana workers pay somewhere between 4% and 5.7% in state and local income tax on all wages, including overtime. If you move to a different county mid-year, the new rate doesn’t apply until the following January 1.
Social Security and Medicare Still Come Off the Top
The federal overtime deduction does nothing for payroll tax. FICA applies to every dollar of overtime. Social Security tax is 6.2% on earnings up to $184,500 in 2026.6Social Security Administration. Contribution and Benefit Base Medicare is 1.45% with no earnings cap, plus an additional 0.9% on wages above $200,000 for the year; your employer starts withholding the extra amount once your wages cross that line, regardless of filing status.7Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
Why Overtime Paychecks Look So Heavily Taxed
The rate isn’t higher; the withholding often is. The IRS treats overtime as supplemental wages, and employers can use a flat 22% federal withholding rate on the supplemental portion or add it to your regular pay and withhold as if the combined total were normal, which can push a check into a higher withholding tier.8Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Stack that federal withholding on top of Indiana’s 2.95%, your county tax, and FICA, and a big overtime week can produce a take-home number that looks nothing like what you expected. Any over-withholding usually returns as a refund at filing, and the new federal deduction narrows the gap between what’s withheld and what you actually owe.
Adjusting Your Indiana Withholding for Regular Overtime
If overtime is a steady part of your schedule, Indiana Form WH-4 lets you tune your state and county withholding. The form is available from the Indiana Department of Revenue.9Indiana Department of Revenue. Withholding Tax Forms It asks for your county of residence and county of principal employment as of January 1, along with exemptions for yourself, your spouse (if not claimed elsewhere), and qualifying dependents.10Indiana Department of Revenue. Employee’s Withholding Exemption and County Status Certificate
For overtime workers, the useful lines are 9 and 10. Line 9 lets you add a flat dollar amount of additional state tax withheld each pay period, and Line 10 does the same for county tax. If you know a heavy overtime stretch is coming, adjusting these amounts prevents a surprise bill.10Indiana Department of Revenue. Employee’s Withholding Exemption and County Status Certificate Update Form W-4 separately for federal withholding; the IRS Tax Withholding Estimator can help you check whether your current settings account for overtime.11Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate New forms usually take one or two pay cycles to reach your paystub.
Avoiding an Indiana Underpayment Penalty
If withholding falls short of your actual tax, Indiana can charge a 10% penalty on the underpaid amount for each quarterly installment period.12Indiana Department of Revenue. Estimated Payments The state’s safe harbor rules mirror the federal ones. No penalty applies if your total payments through withholding and estimated taxes equal at least 90% of your current-year tax or 100% of last year’s tax. If your federal AGI exceeded $150,000 the prior year ($75,000 if married filing separately), the prior-year threshold rises to 110%.13Indiana Department of Revenue. Income Tax Information Bulletin #3
For workers whose overtime swings year to year, the simplest safe harbor is to keep withholding at or above last year’s total Indiana tax. If the current year runs higher, a catch-up estimated payment by January 15 keeps you out of penalty territory.