If you’re an employee or small business owner in California, you’ve seen the headlines:
“No Tax on Overtime!”
President Trump’s new overtime tax break is supposed to save workers up to $90 billion through 2028, and payroll companies are shouting it from the rooftops.
But here’s the catch:
The fine print is real—and if you’re in California, it’s even trickier than most headlines admit.
Let’s break it down so you actually know what qualifies (and what doesn’t).
How Does the Overtime Tax Break Work?
Here’s the big idea:
For tax years 2025–2028, if you earn overtime covered by the federal Fair Labor Standards Act (FLSA), you don’t pay federal income tax on the extra “half” of your time-and-a-half pay.
This is a big deal for millions of hourly employees putting in real overtime.
The Catch: Only Federal Overtime Qualifies
Here’s where it gets sticky for Californians:
Only overtime required by the federal FLSA qualifies for the tax break.
This does NOT include:
Airline, railroad, or some transportation jobs (they follow separate rules)
Overtime paid just because of state laws (like California’s rule where OT starts after 8 hours/day)
Exempt workers or those on special employment contracts
Translation:
If you earn overtime 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 California-mandated OT.
Why Is It So Complicated?
Lawmakers tied this deduction to FLSA overtime because:
It’s a well-known, standardized definition.
It limits the tax break to what Congress intended (and doesn’t bust the federal budget).
Result:
You—and your payroll provider—now have to track two types of overtime:
What you pay overall (per California law)
What actually counts for the federal tax break
For now, Form W-2 won’t break it out. You’ll need detailed payroll statements when you file your 2025 taxes.
California Employees: Double-Check Your Paystubs!
If you’re in California:
You may get overtime for daily hours and weekly hours, but only the federal portion is tax-free.
Employers will eventually need to break out which amounts qualify on your pay stub or payroll report.
Don’t assume all your OT is tax-exempt!
Keep your records, and check with your CPA if you’re not sure.
Bottom Line
The “no tax on overtime” provision is a huge win for many, but it’s not as simple as the headlines suggest—especially in California. Know what qualifies, keep solid records, and check your math before you celebrate that refund.