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Tax Year 2026Updated July 13, 2026

Does Pennsylvania Tax Overtime in 2026?

Yes - Pennsylvania still taxes overtime pay in 2026. The federal OBBBA overtime deduction (IRC §225) does not reduce your Pennsylvania taxable compensation. PA's Personal Income Tax is computed on eight specific classes of income independently of the federal return, so the federal above-the-line deduction has no effect on your PA tax bill. Your overtime premium remains taxable at PA's flat 3.07% rate.

How Pennsylvania's Overtime Tax Treatment Works

Pennsylvania's Personal Income Tax operates independently of the federal tax code. While most states begin their income tax computation from federal AGI or federal taxable income, PA instead taxes eight specific classes of income - compensation, interest, dividends, net business income, net gains, rents and royalties, estate and trust income, and gambling/lottery winnings - each at the flat 3.07% rate.

Overtime pay falls under the "compensation" class in PA. Because PA never references federal AGI, the federal overtime deduction (IRC §225) has no pathway to reduce your PA tax. Even though you can deduct up to $12,500 of overtime premium pay on your federal return, PA taxes the full amount of your overtime compensation.

This is structural non-conformity: Pennsylvania did not actively reject the federal overtime deduction. Its tax system was simply never built to incorporate federal deductions. Note that only the overtime premium (the 0.5x above regular rate) is deductible on the federal return - but for PA purposes, the distinction does not matter because the entire amount remains taxable.

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
Pennsylvania treatmentDoes not apply (independent system)
What qualifies?Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees

Worked Examples Comparing Federal and Pennsylvania Treatment

Example 1: Factory worker with $6,000 in overtime premium pay

Federal return:
Qualifying overtime premium: $6,000
Overtime deduction claimed: $6,000 (capped at $12,500)
Estimated federal tax savings: $720.00

Pennsylvania return:
PA still taxes the full $6,000 overtime premium at 3.07% = $184.20 in PA tax. The federal deduction does not reduce PA liability.

Example 2: Nurse with $12,500 in overtime premium pay (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

Pennsylvania return:
PA still taxes the full $12,500 overtime premium at 3.07% = $383.75 in PA tax. No reduction for the federal deduction.

Pennsylvania-Specific Rules for Overtime Workers

Local taxes add up. Beyond the 3.07% state PIT, most PA workers owe local earned income tax (typically 1%–2%) on overtime pay. Philadelphia residents face a city wage tax of 3.75% on all compensation including overtime. These local taxes are also unaffected by the federal overtime deduction.

No withholding rate difference. Pennsylvania employers withhold at the flat 3.07% rate on all compensation, including overtime. Unlike some states, there is no supplemental withholding rate - the same flat rate applies to regular pay, overtime, and bonuses.

FLSA qualification still matters federally. To claim the federal overtime deduction, you must be a non-exempt employee under the Fair Labor Standards Act (or equivalent state overtime law). Salaried-exempt employees and self-employed individuals are not eligible for the federal deduction, though this distinction does not affect PA tax treatment.

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Frequently Asked Questions

Does the federal 'no tax on overtime' law apply in Pennsylvania?
No. The OBBBA overtime deduction (IRC §225) reduces your federal taxable income only. Pennsylvania's Personal Income Tax is computed on eight specific classes of income - not on federal AGI. Overtime pay is classified as "compensation" under PA law and is taxed at the flat 3.07% rate regardless of any federal deduction.
What part of my overtime pay qualifies for the federal deduction?
Only the premium portion of overtime pay qualifies - that is, the extra 0.5x above your regular hourly rate for time-and-a-half, or the extra 1.0x for double-time. Your base hourly rate during overtime hours is not deductible. For example, if you earn $20/hour and work overtime at time-and-a-half ($30/hour), only $10/hour is the qualifying premium. This applies to the federal return only; PA taxes the full amount.
Why doesn't Pennsylvania follow the federal overtime deduction?
Pennsylvania's income tax system is structurally independent of the federal tax code. PA does not start its tax computation from federal AGI or federal taxable income. Instead, PA calculates tax on eight separate classes of income. Because PA never references federal AGI, there is no mechanism for the federal overtime deduction to reduce PA tax.
What is Pennsylvania's tax rate on overtime pay in 2026?
Overtime pay (including both the base and premium portions) is taxed at Pennsylvania's flat PIT rate of 3.07%. There is no special rate or exemption for overtime income in PA.
Do I still get a federal tax break on overtime if I live in Pennsylvania?
Yes. The federal overtime deduction still applies on your federal Form 1040, saving you up to $12,500 in deductions ($25,000 if filing jointly). Only your Pennsylvania state tax is unaffected.
Is overtime subject to local earned income tax in Pennsylvania?
Yes. Most Pennsylvania municipalities impose a local earned income tax (typically 1%–2%) on all compensation, including overtime pay. Philadelphia also imposes a city wage tax of 3.75% for residents. These local taxes apply in addition to the state PIT and are unaffected by the federal overtime deduction.