Which states enacted overtime wage tax exemptions in 2024–2025 and what reporting steps did each require?
Executive summary
Alabama is the only state identified in the provided reporting that enacted a state-level income tax exemption for overtime wages covering part of 2024–2025, and it paired that exemption with specific employer reporting instructions for W-2s and bulk filings [1]. The major federal change in 2025 — the One, Big, Beautiful Bill Act (OBBBA) creating a federal deduction for “qualified overtime compensation” and new IRS reporting expectations — is distinct from state actions and comes with transition relief for 2025 rather than imposing uniform state conformity [2] [3] [4].
1. Alabama moved first — a limited, time‑bound exemption and specific W‑2 labeling
Alabama’s Department of Revenue published rules implementing Act 2024‑437 that exclude FLSA‑compliant overtime compensation from Alabama gross income for tax periods beginning on or after October 1, 2024, with the exemption explicitly ending June 30, 2025; the department directed employers to report exempt overtime earned during the covered period in Box 14 of the W‑2 using the label “EX OT WAGES,” to omit such wages from Box 16, and to treat bulk filing fields as zero for exempt overtime until further guidance [1].
2. What employers had to do in Alabama — box codes, bulk filing, and pay‑period boundaries
Alabama’s guidance required employers to continue withholding and reporting in the usual ways except for state withholding where exempt overtime was excluded from gross income, and it specified practical steps: put the exempt overtime indicator in Box 14 with the text “EX OT WAGES,” do not include exempt overtime in the Box 16 state wages field, and handle bulk filing spreadsheets by setting overtime fields to zero for the exemption period — a set of employer‑level mechanics intended to prevent state withholding on wages that remained federally and locally reportable [1].
3. Federal law changed in 2025 — deduction plus reporting rules, but states decide conformity
Congress enacted statutory deductions for qualified overtime and tips in OBBBA effective for tax years 2025–2028 and directed employers and payors to furnish statements showing total qualified overtime on W‑2s or 1099s, while the IRS announced transition relief for tax year 2025 and offered guidance about using Box 14 for voluntary employer reporting in 2025 [2] [3] [4]. That federal framework creates a national information‑reporting architecture and a pathway for taxpayers to claim a federal deduction, but it does not automatically change state tax law; states must affirmatively conform or enact their own rules to mirror the federal deduction or exemptions [2].
4. Reporting relief and practical employer steps under federal guidance
The Department of the Treasury and IRS emphasized a transition period for 2025: employers may approximate qualified overtime and report by any reasonable method specified by the Secretary, and the IRS instructed employers who wish to report qualified overtime in 2025 to use Box 14 on the W‑2 because a standardized code or Box 14 field was not yet issued [3] [4]. IRS notices and industry guidance advised payroll departments to update systems, consider putting a QOC amount in Box 14 during 2025, and to expect clearer reporting mechanics for 2026 after the IRS publishes further guidance [4] [5].
5. What the reporting landscape looks like across states given available reporting
Based on the materials provided, Alabama is the sole state explicitly documented here as having enacted a state income‑tax exemption for overtime wages for the late‑2024/first half‑2025 window and it supplied concrete W‑2 reporting language and bulk filing instructions; other cited sources describe the federal deduction and IRS transition relief but do not document additional states enacting parallel exemptions during 2024–2025 in the supplied reporting [1] [2] [4]. If other states changed their treatment of overtime pay for state income tax in 2024–2025, that action is not covered in the provided sources and cannot be asserted on the present record.