There is no tax on overtime in Michigan in the full sense of the phrase — overtime pay is still taxable at both the federal and state level. What changed is that a new federal deduction under the One Big Beautiful Bill Act, and a matching Michigan deduction, let workers subtract the premium portion of their overtime from taxable income for tax years 2025 through 2028. The deductions shrink the tax bill on overtime; they do not erase it.
What the Federal Overtime Deduction Actually Does
The One Big Beautiful Bill Act (Public Law 119-21) created a federal income tax deduction for “qualified overtime compensation” covering tax years 2025 through 2028. It is a deduction, not an exemption. Your overtime still appears as income on your return, and you subtract a portion of it before calculating what you owe.1Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
The deduction is capped at $12,500 per tax return, or $25,000 on a joint return. It begins phasing out once modified adjusted gross income exceeds $150,000 ($300,000 for joint filers). The part that catches most people off guard: only the premium portion of overtime pay qualifies. If you earn time-and-a-half, only the “half” counts. Your regular hourly rate for those extra hours is not part of the deduction.1Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
So if you earn $30 per hour and work 10 overtime hours in a week, you are paid $45 per hour for those extra hours. The qualified overtime compensation is $15 per hour — the premium portion — not the full $45. Over that week, $150 counts toward your deduction, not $450. The math shrinks the benefit faster than most workers expect.
Michigan Had to Pass Its Own Deduction
The federal overtime deduction does not automatically flow through to your Michigan return. Because the federal deduction does not reduce your adjusted gross income, Michigan’s tax base stays unaffected unless the state legislature acts on its own.2Michigan Legislature. HB 4961 Revised Summary as Passed by the House
Michigan recognized that gap and passed legislation allowing taxpayers to deduct qualified overtime compensation from their adjusted gross income for state tax purposes. The state deduction mirrors the federal version. It covers only the overtime premium for hours worked beyond 40 in a workweek, and it applies to tax years beginning after December 31, 2025, and before January 1, 2029. Nonresidents who work in Michigan can only deduct overtime pay earned for services performed inside the state.2Michigan Legislature. HB 4961 Revised Summary as Passed by the House
Both the federal and Michigan deductions apply to the same slice of your overtime pay. If you earn $10,000 in overtime premiums during 2026, you can deduct up to $10,000 on both your federal and Michigan returns, subject to the $12,500 federal cap and the income phaseout. At Michigan’s flat tax rate, that saves $425 on your state return.
What Counts as Qualified Overtime
The rules defining qualified overtime are narrower than most workers assume. Only overtime required under Section 7 of the Fair Labor Standards Act qualifies. That covers the federally mandated time-and-a-half for nonexempt employees who work more than 40 hours in a seven-day workweek.1Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Several common situations fall outside the deduction:
- Overtime required solely by Michigan law or by a union contract, with no FLSA requirement behind it, does not qualify.
- Salaried workers classified as exempt under the FLSA do not receive FLSA-mandated overtime, so any extra pay they receive does not qualify even if the employer labels it “overtime.”
- If your employer pays double time instead of time-and-a-half, only the half required by the FLSA counts. The extra half is ordinary taxable income.
Employers must separately identify qualified overtime compensation on tax forms starting in 2026, so you should not need to calculate the premium portion yourself. If the amount reported looks off, compare it against your pay stubs to confirm that only the FLSA premium is included.1Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
The Michigan Tax That Still Applies
Michigan defines taxable income by starting with federal adjusted gross income and applying its own modifications.3Michigan Legislature. Michigan Compiled Laws 206.30 – Taxable Income Defined There are no brackets. Every dollar of taxable income is taxed at the same flat rate of 4.25 percent, whether it comes from your first hour of work or your sixtieth.4Michigan Legislature. Michigan Code 206.51 – Tax Rate on Taxable Income of Person Other Than Corporation
The Michigan Department of Treasury confirmed the 4.25 percent rate for the 2026 tax year after determining that general fund revenue conditions did not trigger the statutory formula for a rate reduction.5Michigan Department of Treasury. 4.25% Income Tax Rate for Individuals and Fiduciaries in 2026 Tax Year A personal exemption of $5,900 per exemption is subtracted before the tax is calculated.6Michigan Department of Treasury. Withholding Tax Information by Calendar Year
The flat rate works in overtime’s favor in one respect. Unlike federal tax, where extra earnings can push you into a higher bracket, Michigan taxes every additional dollar at the same 4.25 percent. Working more hours never bumps you to a higher state rate. Michigan employers must withhold state income tax from every paycheck at that same rate, overtime included.6Michigan Department of Treasury. Withholding Tax Information by Calendar Year
City Income Taxes Are Not Covered
Michigan is one of the few states where cities can impose their own income tax. Under the City Income Tax Act, cities that adopt the uniform ordinance may tax the income of residents and people who work within city limits.7Michigan Legislature. Michigan Code Act 284 of 1964 – City Income Tax Act Over two dozen Michigan cities levy this tax. Rates can reach up to 3 percent for residents, with nonresident rates capped at half the resident rate.8Michigan Legislature. Michigan Compiled Laws 141.651 – Uniform City Income Tax Ordinance
City income taxes apply to all compensation, including overtime. If you live or work in Detroit, Grand Rapids, Lansing, or another taxing city, your overtime earnings face this additional layer on top of state and federal tax. The federal and state overtime deductions do not carry over to city income tax. Each city’s ordinance would need separate amendment to exempt overtime pay. Until that happens, every dollar of overtime you earn in a taxing city stays fully subject to the local rate.
What the Savings Look Like in Practice
A Michigan worker earning $25 per hour who puts in 10 overtime hours per week earns roughly $187.50 in overtime premiums each week — the “half” portion of $37.50 per hour, across 10 hours. Over a full year, that is about $9,750 in qualified overtime compensation. The federal deduction removes that amount from federal taxable income at the worker’s marginal rate, and the Michigan deduction saves an additional $414 at the 4.25 percent flat rate. Workers in cities with local income taxes would save on that layer too, but only if their city later adopts a matching exemption.
The deductions are temporary. They run through the 2028 tax year at the federal level and on the same timeline in Michigan. Employers must report qualified overtime separately on tax documents starting in 2026, but check the reported amounts against your own records. If your overtime comes from a source other than the FLSA, such as a collective bargaining agreement or a state-law requirement without a federal counterpart, that pay remains fully taxable at every level.