When Does No Tax on Overtime Start in Kentucky?

There is no tax on overtime in Kentucky at the state level, and there is no complete federal exemption either. What exists is a federal deduction created by the One Big Beautiful Bill Act, retroactive to January 1, 2025 and running through the end of 2028, that lets you subtract the premium portion of FLSA-required overtime pay from your federal taxable income.¹ Kentucky’s 3.5% individual income tax still applies to every dollar of overtime unless the General Assembly changes the law.²

When the Federal Deduction Started and How Long It Lasts

The deduction is already in force. It covers tax years 2025 through 2028, so overtime you earned any time in 2025 is eligible when you file. The IRS has said it will provide transition relief for the 2025 tax year while employers and taxpayers adjust to the new reporting rules.¹ It is an above-the-line deduction, so you can claim it whether you itemize or take the standard deduction. Unless Congress extends it, the deduction ends after 2028.

What Actually Gets Deducted

This is the part most workers misread. The deduction covers only the premium half of time-and-a-half pay, not the full overtime check. Work 10 hours of overtime at a $20 base rate and your overtime pay is $300. The deductible amount is the $100 premium, not the $300.¹

The overtime also has to be required by the Fair Labor Standards Act and reported on a W-2, 1099, or other specified statement. Voluntary premium pay or bonuses an employer labels as “overtime” don’t count if they aren’t tied to FLSA overtime calculations.

Caps and Income Phase-Outs

The annual deduction cap is $12,500 for single filers and $25,000 for married couples filing jointly. The deduction phases out for taxpayers whose modified adjusted gross income exceeds $150,000 ($300,000 joint).¹ A Kentucky nurse earning $55,000 in base pay with $8,000 in overtime premiums deducts the full $8,000. A worker over $150,000 sees the deduction shrink or disappear.

You have to include your Social Security number on the return, and married taxpayers must file jointly. Employers are required to file information returns and furnish statements showing the total qualified overtime compensation paid during the year.¹

Who Qualifies in Kentucky

Only non-exempt employees under the FLSA can use the deduction. Exempt status is determined by actual job duties and salary, not job title.³ Workers in the standard FLSA exempt categories are not eligible:

Executive employees whose primary duty is managing the business or a department and who regularly direct at least two full-time employees.
Administrative employees performing office or non-manual work tied to management or general operations, exercising independent judgment on significant matters.
Learned professionals whose work requires advanced knowledge typically acquired through prolonged specialized education.
Computer professionals working as systems analysts, programmers, software engineers, or similar roles.
Outside sales employees who primarily make sales away from the employer’s place of business.

If you earn time-and-a-half once you cross 40 hours in a workweek, you almost certainly qualify. That covers most hourly workers in Kentucky’s overtime-heavy industries, including health care, manufacturing, construction, law enforcement, and emergency services.

Kentucky State Tax Still Applies

Kentucky’s flat individual income tax rate drops to 3.5% for 2026, and that rate applies to all wages, including overtime.² The state has no exemption or deduction for overtime pay.

Legislators have tried. During the 2025 Regular Session, House Bill 26 proposed excluding tips and overtime compensation from Kentucky individual income tax for tax years 2026 through 2030, using the FLSA definition of overtime. The bill died.⁴ In the 2026 session, House Bill 452 was introduced to allow similar treatment of qualified tips and overtime compensation under KRS 141.010 and KRS 141.019.⁵

A separate open question is whether Kentucky will conform to the federal deduction on state returns. Some states automatically pick up federal adjustments to gross income; others have decoupled from specific provisions of the One Big Beautiful Bill Act. As of early 2026, Kentucky has not announced whether it will require an add-back of the federal overtime deduction or let it flow through. Watch for guidance from the Kentucky Department of Revenue as the filing season moves along.

What Still Comes Out of Your Overtime Check

Even with the federal deduction, three layers of tax remain on overtime pay for Kentucky workers.

Social Security and Medicare payroll taxes apply to all overtime wages in full. The federal definition of wages for FICA purposes includes all remuneration for employment, and no overtime deduction changes that.⁶ You’ll see 6.2% for Social Security and 1.45% for Medicare withheld from every overtime dollar. Those contributions do count toward your Social Security retirement benefits, which are based on your highest 35 years of indexed earnings.⁷

Federal income tax still applies to the base-rate portion of your overtime pay. Only the premium half is deductible. In the earlier example, the $200 base-rate portion of the 10 overtime hours remains fully taxable at the federal level.

Kentucky’s 3.5% state income tax applies to the full overtime amount, premium included.²

Records to Keep

Employers are required under the new federal law to report qualified overtime compensation on information returns and worker statements. Keep your own copies anyway. Pay stubs, time records, and anything showing hours above 40 per week and the premium rate paid will protect your deduction if the IRS or the Kentucky Department of Revenue has questions.

Federal law already requires employers to retain basic payroll records for at least three years and the records used to compute wages, like time cards and schedules, for at least two years.⁸ Hold your own records at least as long, because audits can reach back several years and because you may change jobs during that window.

1
Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
2
Kentucky Department of Revenue. 2026 Kentucky Withholding Tax Formula
3
U.S. Department of Labor. Fact Sheet 17A: Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the Fair Labor Standards Act
4
Kentucky Legislative Research Commission. Fiscal Note Statement – HB 26, 2025 Regular Session
5
Kentucky Legislative Research Commission. 26RS HB 452
6
Office of the Law Revision Counsel. 26 USC 3121 – Definitions
7
Social Security Administration. Social Security Benefit Amounts
8
U.S. Department of Labor. Fact Sheet: Recordkeeping Requirements Under the Fair Labor Standards Act