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Tax Year 2026Updated July 13, 2026

Does Colorado Tax Overtime in 2026?

No - Colorado does not tax overtime premium pay that qualifies for the federal OBBBA deduction in 2026. Colorado computes its income tax starting from federal taxable income, so the federal overtime deduction (IRC §225, up to $12,500 single / $25,000 MFJ) automatically reduces your Colorado tax base without any separate state action. This structural flow-through mechanism means Colorado workers who earn qualifying overtime premium pay receive both the federal and state income tax benefit from a single deduction on their federal return.

How Colorado's Overtime Tax Treatment Works

Colorado’s income tax system uses federal taxable income as its starting point - the figure from federal Form 1040, line 15. The state applies its flat 4.40% rate directly to that number without separate state adjustments for standard deductions or personal exemptions. This design choice is what makes Colorado one of the strongest automatic-conformity states for the OBBBA overtime deduction.

The OBBBA overtime deduction (IRC §225) is an above-the-line deduction for the premium portion of overtime wages earned by non-exempt employees. When a Colorado worker claims this deduction on their federal return via Schedule 1-A, it reduces federal taxable income. Because Colorado’s entire state tax calculation begins with that reduced federal figure, the overtime deduction is already incorporated into the state tax base before Colorado’s 4.40% rate is applied.

This is the structural flow-through mechanism: Colorado did not need to pass separate legislation to conform to the OBBBA overtime provision. The deduction was automatically captured by the state’s longstanding choice to compute tax from federal taxable income. The Colorado Department of Revenue has confirmed that no add-back is required for OBBBA deductions, making Colorado one of the most straightforward states for overtime workers seeking the deduction.

Federal Overtime Deduction Quick Reference

DetailValue
IRC Section§225 (OBBBA)
Maximum deduction$12,500 overtime ($25,000 MFJ)
Deduction typeAbove-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 datesJan 1, 2025 – Dec 31, 2028
Colorado treatmentConforms
What qualifies?Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees

Worked Examples Comparing Federal and Colorado Treatment

Example 1: Warehouse worker with $8,000 in overtime premium (single filer, 12% federal bracket)

Federal return:
Qualifying overtime premium: $8,000
Overtime deduction claimed: $8,000 (capped at $12,500)
Estimated federal tax savings: $960.00

Colorado return:
State tax savings from deduction: $352.00
Colorado’s 4.40% flat rate applies to the reduced federal taxable income. The $8,000 overtime deduction flows through automatically, saving $352.00 in Colorado state tax.

Example 2: Nurse with $12,500 in overtime premium (single filer, 22% federal bracket)

Federal return:
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00

Colorado return:
State tax savings from deduction: $550.00
This worker claims the full $12,500 cap. The deduction reduces both federal taxable income and Colorado taxable income by the same amount. No Colorado add-back or separate form is required.

Colorado-Specific Rules for Overtime Workers

Premium-only rule: Remember that only the overtime premium qualifies for the deduction - not the total overtime wage. For a worker earning $20/hour regular pay and $30/hour overtime (time-and-a-half), only the $10/hour premium is deductible. Colorado does not modify this federal rule; the same premium calculation applies for both federal and Colorado purposes.

FAMLI still applies: Colorado’s Family and Medical Leave Insurance (FAMLI) program charges employees 0.45% of all wages, including overtime pay. The OBBBA overtime deduction does not reduce FAMLI contributions. Overtime workers should expect to continue paying FAMLI premiums on their full overtime wages, not just the premium portion.

No local income tax: Colorado has no local income taxes, so there is no additional city or county layer to consider for overtime tax treatment. The only state-level income tax impact is the 4.40% flat rate savings from the deduction flowing through.

W-2 Code TT: Starting in tax year 2026, employers must report qualifying overtime premium pay using W-2 Box 12 Code TT. Colorado relies on federal W-2 reporting - there is no separate Colorado wage reporting code for overtime.

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Frequently Asked Questions

Does Colorado conform to the OBBBA no-tax-on-overtime provision?
Yes. Colorado taxes federal taxable income at a flat 4.40% rate. The OBBBA overtime deduction (IRC §225) reduces federal taxable income, and Colorado’s tax base is that same reduced figure. The Colorado Department of Revenue has confirmed no add-back is required for OBBBA deductions.
Do I still pay FICA on overtime in Colorado?
Yes. The OBBBA overtime deduction only applies to federal and state income taxes. Social Security tax (6.2%) and Medicare tax (1.45%) still apply to all overtime wages. Colorado’s FAMLI program (0.45% employee share) also applies to overtime pay.
What qualifies as deductible overtime in Colorado?
Only the overtime premium qualifies - not the full overtime wage. For time-and-a-half pay, only the 0.5x portion above your regular hourly rate is deductible. For example, if your regular rate is $25/hour and you earn $37.50/hour for overtime, only the $12.50 premium per hour qualifies. You must be a non-exempt employee under the FLSA (or equivalent state law). Salaried-exempt employees and self-employed individuals are not eligible.
What is the overtime deduction cap for Colorado filers?
The cap is set by the federal provision: $12,500 for single and head-of-household filers, $25,000 for married filing jointly. Colorado does not impose a separate state cap - whatever reduces your federal taxable income also reduces your Colorado taxable income dollar-for-dollar.
How does Colorado's structural flow-through work for overtime?
Colorado computes state income tax starting from federal taxable income (Form 1040, line 15). The OBBBA overtime deduction is an above-the-line deduction reported on Schedule 1-A that reduces federal taxable income before Colorado ever applies its 4.40% rate. No separate Colorado form, schedule, or legislation is involved - the deduction is already built into the state starting point.
Can Married Filing Separately filers claim the overtime deduction in Colorado?
No. The federal OBBBA overtime deduction (IRC §225) excludes Married Filing Separately filers. Since Colorado’s benefit flows through the federal deduction, MFS filers cannot benefit at either the federal or state level.