Tax Year 2026Updated July 13, 2026

Does Kentucky Tax Overtime in 2026?

Yes - Kentucky fully taxes overtime pay in 2026. Kentucky's income tax law conforms to the Internal Revenue Code as of December 31, 2024 (KRS 141.010), which predates the OBBBA (enacted July 2025). The federal overtime deduction (IRC §225) does not exist in the version of the IRC that Kentucky follows. All overtime premium pay is subject to Kentucky's flat 3.5% income tax. Local occupational taxes (1%-2.5% in many cities) may also apply.

How Kentucky's Overtime Tax Treatment Works

Kentucky uses a "fixed-date" IRC conformity model. Under KRS 141.010, Kentucky's individual income tax law references the Internal Revenue Code as it existed on December 31, 2024. The OBBBA, enacted in July 2025, created the overtime deduction (IRC §225) as a new above-the-line adjustment allowing workers to deduct up to $12,500 ($25,000 MFJ) in qualifying overtime premium pay from federal AGI.

Because this provision did not exist in the IRC as of December 31, 2024, it is simply not part of Kentucky's tax law. Kentucky starts its income tax calculation from federal adjusted gross income with Kentucky-specific modifications, but the OBBBA overtime deduction is not recognized in Kentucky's version of the tax code.

This means Kentucky workers get the federal benefit of the overtime deduction on their IRS return but receive no corresponding state-level relief. Their overtime pay remains fully subject to Kentucky's flat 3.5% income tax rate, plus any applicable local occupational taxes.

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
Kentucky treatment	Does not conform
What qualifies?	Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees

Worked Examples Comparing Federal and Kentucky Treatment

Example 1: Factory worker (single filer, $50,000 income, $8,000 overtime premium)

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

Kentucky return:
Kentucky does not recognize the federal overtime deduction because its IRC conformity date (December 31, 2024) predates the OBBBA. The full $8,000 in overtime premium pay is subject to Kentucky's flat 3.5% income tax. Estimated KY tax on this overtime: $280.

Example 2: Nurse (single filer, $75,000 income, $12,500 overtime premium - federal cap reached)

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

Kentucky return:
Kentucky does not recognize the federal overtime deduction. The full $12,500 in overtime premium pay is subject to Kentucky's flat 3.5% income tax. Estimated KY tax on this overtime: $437.50.

Kentucky's Fixed Conformity Date Creates an OBBBA Gap

Kentucky periodically updates its IRC conformity date through legislative action, most recently to December 31, 2024. This update predates the OBBBA by approximately seven months. Until the Kentucky Legislature advances the conformity date, none of the OBBBA provisions - tips deduction, overtime deduction, or senior bonus deduction - will apply for Kentucky income tax purposes.

The 2026 Kentucky withholding formula (Form 42A003, revised October 2025) is silent on any overtime deduction, confirming that Kentucky's tax administration has not incorporated the OBBBA provisions into its withholding calculations.

Kentucky's Flat Rate Reduction Provides Some Relief

While overtime remains fully taxable, Kentucky workers benefit from the ongoing rate reduction schedule. The flat rate dropped from 4.0% in 2025 to 3.5% in 2026 under HB 1 (signed February 6, 2025). This means the state tax burden on overtime is lower than it would have been under the old rate, even without the OBBBA deduction.

Local Occupational Taxes Compound the Cost

Kentucky's largest cities impose occupational license fees on wages earned within their boundaries. These fees typically range from 1% to 2.5% and apply to all compensation including overtime. For example:

Louisville/Jefferson County: Occupational tax applies to all wages including overtime
Lexington-Fayette: Occupational tax applies to all wages including overtime

A worker earning overtime in Louisville faces the 3.5% state income tax plus the local occupational fee on the same overtime income, with no deduction available at either level. The combined state-plus-local burden on overtime can approach 5%-6% depending on the municipality.

Related Tools

No Tax on Overtime Calculator - calculate your federal overtime deduction
Kentucky Tax Guide - full state tax overview
Kentucky Paycheck Calculator
Does Kentucky Tax Tips?
W-2 Code TP: Tips Reporting Guide
W-2 Code TT: Overtime Reporting Guide
All 51 States: Tips & Overtime Tax Map

Frequently Asked Questions

Does Kentucky tax overtime pay in 2026?

Yes. Overtime pay is fully taxable in Kentucky in 2026. The federal OBBBA overtime deduction (IRC §225) was enacted in July 2025, but Kentucky's income tax law conforms to the IRC as of December 31, 2024. Because the OBBBA postdates Kentucky's conformity date, the overtime deduction has no effect on your Kentucky return.

What is Kentucky's IRC conformity date and why does it matter?

Kentucky's tax code references the Internal Revenue Code as it existed on December 31, 2024 (KRS 141.010). This means any federal tax provision enacted after that date - including the entire OBBBA - does not apply to Kentucky state taxes. The Kentucky Legislature must pass a bill updating the conformity date to include newer federal provisions.

What Kentucky income tax rate applies to my overtime pay?

Kentucky imposes a flat 3.5% income tax on all taxable income for tax year 2026 (reduced from 4.0% in 2025 under HB 1). Overtime premium pay is taxed at the same flat 3.5% rate as regular wages. There is no special treatment or reduced rate for overtime income in Kentucky.

Do local occupational taxes in Kentucky also apply to overtime pay?

Yes. Many Kentucky municipalities impose occupational license fees (typically 1% to 2.5%) on wages earned within city limits, including Louisville, Lexington, and other cities. These fees apply to all compensation, including overtime premium pay. A worker in Louisville faces both the 3.5% state income tax and the local occupational fee on overtime earnings.

Could Kentucky update its conformity date to include the OBBBA overtime deduction?

Yes. The Kentucky Legislature could update its IRC conformity date to July 2025 or later, which would bring the OBBBA overtime deduction into Kentucky law. However, as of August 2026, no such legislation has been enacted or introduced. Workers should plan on overtime being fully taxable in Kentucky for the 2026 tax year.

Does the federal overtime deduction on my federal return affect my Kentucky taxes at all?

Indirectly, it could have a minor effect. Kentucky starts its tax calculation from federal adjusted gross income (FAGI) - but using pre-OBBBA IRC rules for its own computation. The federal overtime deduction reduces your FAGI on your federal return. However, because Kentucky does not conform to the OBBBA, Kentucky must add back the OBBBA deductions when computing Kentucky AGI. The net effect is that your overtime remains fully taxable in Kentucky.