Does Illinois Tax Overtime in 2026?
Yes - Illinois still taxes overtime pay in 2026. Although Illinois starts its tax computation from federal AGI, the state requires the federal OBBBA overtime deduction (IRC §225) to be added back on Illinois Schedule M. This means your overtime premium is still fully taxed at IL's flat 4.95% rate - the federal deduction provides no Illinois tax savings.
How Illinois's Overtime Tax Treatment Works
Illinois computes its income tax starting from federal adjusted gross income (AGI), which means federal deductions that reduce AGI would normally flow through to Illinois. However, Illinois maintains a list of "addback" items on Schedule M - federal deductions that the state does not recognize. The OBBBA overtime deduction (IRC §225) is one of these addback items.
Here is how it works in practice: You file your federal Form 1040 and claim the overtime deduction, reducing your federal AGI. When you file your IL-1040, you start from that reduced AGI but then add the overtime deduction amount back on Schedule M, Line [applicable]. The result is that your Illinois base income is the same as if the federal overtime deduction did not exist.
This "addback" mechanism differs from the structural non-conformity seen in Pennsylvania and New Jersey. Those states have entirely separate tax systems that never reference federal AGI. Illinois, by contrast, chooses not to conform to this specific federal deduction. The General Assembly could change this by passing legislation, but as of 2026, the addback requirement stands.
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:
IL requires the $4,500 federal overtime deduction to be added back on Schedule M. Your overtime premium is still taxed at 4.95% = $222.75 in IL tax. No state-level savings.
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:
IL requires the $12,500 federal overtime deduction to be added back on Schedule M. Your overtime premium is still taxed at 4.95% = $618.75 in IL tax. No state-level savings.
Illinois-Specific Rules for Overtime Workers
Schedule M addback is mandatory. If you claim the federal overtime deduction on your Form 1040, you must add it back on Illinois Schedule M when filing your IL-1040. IDOR may assess penalties and interest for failing to include required addback items.
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