Does Arizona Tax Overtime in 2026?
No - Arizona does not tax qualifying overtime premium pay under the OBBBA deduction in 2026. Arizona adopted the Internal Revenue Code through early 2026 via SB 1171, which captures the overtime deduction (IRC §225, up to $12,500 single / $25,000 MFJ). Because Arizona starts its income tax calculation from federal AGI and the overtime deduction is above-the-line, Arizona workers automatically receive the state tax benefit when they claim the federal deduction.
How Arizona's Overtime Tax Treatment Works
Arizona conforms to the OBBBA overtime deduction through its IRC adoption mechanism. SB 1171, passed in Arizona’s 2025 legislative session, adopted the Internal Revenue Code as amended through early 2026. This legislative act captures all OBBBA provisions, including the overtime premium deduction under IRC §225. Arizona did not pass a standalone "no tax on overtime" bill; the IRC conformity update accomplished the same outcome.
Arizona’s income tax starts from federal adjusted gross income (AGI), then applies Arizona-specific additions and subtractions. The OBBBA overtime deduction is an above-the-line deduction reported on federal Schedule 1-A - it reduces federal AGI before Arizona’s computation begins. This means the deduction is already embedded in Arizona’s starting figure. The Arizona Department of Revenue has confirmed that overtime workers who claim the federal deduction will see their Arizona taxable income reduced by the same amount.
An important distinction for overtime: only the premium portion of overtime pay is deductible, not the total overtime wage. For a worker earning time-and-a-half, only the 0.5x premium above the regular rate qualifies. Arizona does not modify this federal rule - the same premium-only limitation applies for both federal and Arizona tax purposes.
Federal Overtime Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §225 (OBBBA) |
| Maximum deduction | $12,500 overtime ($25,000 MFJ) |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Arizona treatment | Conforms |
| What qualifies? | Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees |
Worked Examples Comparing Federal and Arizona Treatment
Example 1: Construction worker with $6,000 in overtime premium (single filer, 12% federal bracket)
Qualifying overtime premium: $6,000
Overtime deduction claimed: $6,000 (capped at $12,500)
Estimated federal tax savings: $720.00
Arizona return:
State tax savings from deduction: $150.00
Arizona’s 2.5% flat rate applies to Arizona taxable income, which starts from federal AGI. The $6,000 overtime deduction reduces federal AGI, flowing through to save $150.00 in Arizona state tax.
Example 2: Manufacturing worker with $12,500 in overtime premium (single filer, 22% federal bracket)
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00
Arizona return:
State tax savings from deduction: $312.50
This worker claims the full $12,500 single-filer cap. Arizona adopted IRC §225 via SB 1171, so the full deduction flows through to reduce Arizona taxable income.
Arizona-Specific Rules for Overtime Workers
Low flat rate context: Arizona’s 2.5% flat income tax rate means the state tax savings from the overtime deduction is proportionally smaller than in higher-rate states. However, the combination of full OBBBA conformity and a low overall tax burden makes Arizona one of the most favorable states for overtime workers. A worker claiming the full $12,500 deduction saves $312.50 in Arizona state tax in addition to the federal savings.
No state payroll tax: Arizona does not have a state-level paid family leave or disability insurance program. This means overtime wages in Arizona are not subject to any state payroll taxes beyond the standard federal FICA. Combined with OBBBA conformity, Arizona overtime workers face a relatively light total tax burden on qualifying premium pay.
Form A-4 and overtime withholding: Arizona uses an elective withholding system via Form A-4. Overtime workers should consider updating their A-4 election to account for the overtime deduction when estimating annual Arizona tax liability. The default supplemental withholding rate is 2.0%, but employees can choose a different percentage.
W-2 Code TT and IRC adoption: Arizona’s SB 1171 IRC adoption means the state recognizes W-2 Box 12 Code TT for qualifying overtime premium pay starting in TY 2026. Employers follow the same federal reporting standards - no Arizona-specific overtime wage code exists.
Related Tools
- No Tax on Overtime Calculator - calculate your federal overtime deduction
- Arizona Tax Guide - full state tax overview
- Arizona Paycheck Calculator
- Does Arizona Tax Tips?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map