🍌 No Tax on Overtime: Why This Popular Tax Break Isn’t So Simple (Especially in California)

July 2025

If you’re an employee or small business owner in California, you’ve probably seen the headlines: “No tax on overtime!”
President Trump’s big overtime tax break could save American workers up to $90 billion through 2028, and every payroll company and cable news pundit is hyping it up.

But before you go celebrating with a gorilla-sized pizza party, there’s a ton of fine print—and California’s rules make it even trickier.

Let’s cut through the jungle of details so you know what actually qualifies.

🦍 How Does the Overtime Tax Break Work?

Here’s the big idea:

• For 2025 and beyond, if you earn “overtime” pay covered under the federal Fair Labor Standards Act (FLSA), you won’t pay federal income tax on the extra “half” pay (the “and-a-half” in time-and-a-half).

• That means big tax savings for millions of American workers—especially hourly employees logging real overtime.

🦔 The Catch: Only FLSA Overtime Qualifies

Here’s where things get sticky (and where California SMBs and workers need to pay close attention):

• Only overtime required under the federal FLSA qualifies.

• Does NOT include:

  • Airline, railroad, and some transportation jobs (covered by different federal laws)

  • Overtime paid under state laws like California’s, where OT starts after 8 hours/day (FLSA requires OT only after 40 hours/week)

  • Exempt workers or those on special contracts

• Translation:

  • If you get overtime just because California says so (e.g., after 8 hours in a day but not 40 in a week), that pay doesn’t qualify for the no-tax treatment.

  • Only the “federal” portion counts, not the extra California-mandated OT.

🏆 Why Is It So Complicated?

Lawmakers tied the deduction to FLSA overtime for two reasons:

• It’s a standard definition everyone knows (at least in payroll departments!).

• It keeps the federal government from losing too much revenue.

But that means you (and your payroll provider) need to track two sets of overtime:

• What you pay overall

• What actually counts for the federal tax break

For now, Form W-2 won’t change. You’ll need to keep payroll statements handy when you file your taxes in 2026.

🍌 California: Double-Check Your Paystubs!

If you’re in California:

• You may get paid overtime for daily hours and weekly hours, but only the federal portion is tax-free.

• Employers must (eventually) break out the qualifying amounts on your pay stub or payroll report.

• Don’t just assume all your OT is tax-exempt!

🦍 Bottom Line

The “no tax on overtime” policy is a huge win for many—but it’s not as simple as the headlines make it sound, especially in California.
Know what qualifies, keep great records, and double-check your math before you celebrate with that tax refund.

Still confused?
Drop your overtime questions in the comments or DM us. We’ll help you swing through the fine print—no banana peels required.