Does Illinois Tax Overtime in 2026?
Yes - Illinois still taxes overtime pay in 2026. Illinois starts from federal AGI, and the federal OBBBA overtime deduction (IRC §225) is taken after AGI, so it never enters the Illinois calculation. Your overtime premium is taxed at IL's flat 4.95% rate - the federal deduction provides no Illinois tax savings, and there is no Schedule M addback.
How Illinois's Overtime Tax Treatment Works
Illinois computes its income tax starting from federal adjusted gross income (AGI) on line 1 of the IL-1040, then applies Illinois additions and subtractions on Schedule M.
The OBBBA overtime deduction (IRC §225) is not part of AGI. It is figured on Schedule 1-A, which starts from AGI, and subtracted on Form 1040 line 13b to reach federal taxable income. Illinois picks up the federal figure before that step, so the overtime deduction never reaches the Illinois return and there is nothing to add back.
The result is the same as non-conformity: overtime premium pay is taxed at the full 4.95% flat rate. Illinois workers would get state relief only if Illinois enacted its own subtraction for overtime, which it has not done for 2026.
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 |
| Illinois treatment | Does not conform |
| What qualifies? | Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees |
Worked Examples Comparing Federal and Illinois Treatment
Example 1: Healthcare aide with $4,500 in overtime premium pay
Qualifying overtime premium: $4,500
Overtime deduction claimed: $4,500 (capped at $12,500)
Estimated federal tax savings: $540.00
Illinois return:
The $4,500 federal overtime deduction is taken after AGI, so it never reaches your IL-1040. Your overtime premium is taxed at 4.95% = $222.75 in IL tax. No state-level savings, and no Schedule M entry.
Example 2: Manufacturing worker with $12,500 in overtime premium (federal cap reached)
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00
Illinois return:
The $12,500 federal overtime deduction is taken after AGI, so it never reaches your IL-1040. Your overtime premium is taxed at 4.95% = $618.75 in IL tax. No state-level savings, and no Schedule M entry.
Illinois-Specific Rules for Overtime Workers
No Schedule M entry for overtime. Start your IL-1040 from federal AGI as usual. The federal overtime deduction is not part of that figure, and Schedule M has no line for it.
Flat rate simplifies the calculation. Because Illinois uses a flat 4.95% rate, the state tax cost of non-conformity is straightforward: multiply your overtime premium by 4.95%. There are no graduated brackets that would change the marginal impact based on total income.
FLSA qualification matters for the federal deduction. Only non-exempt employees under the Fair Labor Standards Act (or equivalent state law) qualify for the federal overtime deduction. Salaried-exempt employees do not qualify. However, for Illinois tax purposes, all overtime pay is treated the same regardless of FLSA status - it is all taxed at 4.95%.
No local income tax in Illinois. Unlike some neighboring states, Illinois does not impose local or municipal income taxes. The state's flat 4.95% rate is the only state-level income tax on overtime pay.
Related Tools
- No Tax on Overtime Calculator - calculate your federal overtime deduction
- Illinois Tax Guide - full state tax overview
- Illinois Paycheck Calculator
- Does Illinois Tax Tips?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map