States With No Tax On Overtime Pay, Who Is Leading In Tax Exemption?

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As of March 6, 2025, sentiment on tax exemption on overtime pay is shifting. A handful of states are stepping up to ease the burden on workers' extra hours. Now, this is not a small number to be dismissed. According to BLS data, an estimated 34 million workers clock beyond 40 hours weekly. States with no tax on overtime pay are rare, but they're making huge waves by leaning towards tax exemption on overtime pay. This offers a glimpse into a growing list of states with tax exemption on overtime policies either active or in the works.

The current shift is no longer a mere payroll tweak. It's a redefinition of reward in the tight labor market. Alabama's no tax on overtime pay has brought a 5% spike in overtime volunteered since the tax break was introduction. The state showed a productivity boost with its policy chance that could ripple nationwide.

Alabama leads, impacting roughly 8% of its hourly workforce with untaxed overtime, while Georgia's potential shift could affect millions more. Though recent polls on state no tax on overtime rules are scarce this early in 2025, the Tax Foundation notes a federal exemption could cut revenue by $680 billion over a decade—fuel for HR debates on fairness and retention.

Alabama has taken the lead in states offering tax exemption on overtime. Since January 1, 2024, it stands as the only state fully exempting overtime pay from state income tax. This policy is rooted in House Bill 217 and refined by Act 2024-437 .

Alabama's overtime pay exemption applies to full-time hourly workers exceeding 40 hours a week under the Fair Labor Standards Act (FLSA) . The state's exclusion of overtime wages is in place through June 30, 2025.

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