If you’re working a job in Tennessee, you already know the big perk: no state income tax. You look at your paycheck, and that "State Tax" line is a beautiful, empty zero. So, when people start asking about when does no tax on overtime start in Tennessee, there’s usually a bit of a head-scratching moment.
Honestly, the answer depends entirely on whether you’re talking about your state taxes or your federal ones.
Because Tennessee doesn't tax your wages at the state level, "no tax on overtime" has actually been the reality for Tennessee residents for years—at least regarding state-level collections. But things changed in a massive way recently at the federal level.
The New Federal Reality: One Big Beautiful Bill Act
The buzz you’re hearing lately isn't coming from Nashville; it’s coming from Washington D.C. In July 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law. This is the piece of legislation that everyone is talking about when they ask about overtime tax relief.
Basically, this law created a brand-new federal income tax deduction for overtime pay.
When does no tax on overtime start in Tennessee? For federal purposes, it officially kicked in on January 1, 2025.
Even though the law wasn't signed until mid-2025, it was made retroactive. That means if you were grinding out 50-hour weeks back in January or February of 2025, those "extra" hours are eligible for this new tax break. You’ll see the impact of this when you file your 2025 tax returns during the 2026 tax season.
How the "No Tax" Math Actually Works
Don't quit your day job thinking every penny of your overtime is now invisible to the IRS. It’s not that simple. The law doesn't just wipe away the tax; it creates a specific deduction.
Here is the kicker: the deduction only applies to the premium portion of your overtime pay.
Let's say you make $20 an hour. Your overtime rate is "time-and-a-half," which is $30 an hour. Under the OBBBA, the first $20 (your base rate) is still taxed like normal. Only that extra $10—the "half" part of the time-and-a-half—is eligible for the deduction.
It’s a bit of a letdown if you were expecting the whole $30 to be tax-free, but it still adds up to a lot of money over a year.
Who Actually Qualifies?
Not every worker in the Volunteer State gets to claim this. You have to meet some pretty specific criteria:
- W-2 Employees only: If you’re a 1099 contractor or a gig worker, you're likely out of luck.
- Non-Exempt status: You must be a non-exempt employee under the Fair Labor Standards Act (FLSA). In plain English? You have to be someone who is legally required to be paid overtime.
- Income Caps: There’s a ceiling. If you’re a single filer and your Modified Adjusted Gross Income (MAGI) is over $150,000, the benefit starts to disappear. For married couples filing jointly, that cap is $300,000.
Tennessee’s Unique Position (The State Tax Angle)
In other states like Kentucky or Georgia, workers are celebrating because they might get a break on both federal and state taxes. In Tennessee, we’re already ahead of the game.
Since Tennessee has no state income tax on earned wages, there was never any state tax on overtime to begin with.
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However, don't confuse income tax with payroll tax. You—and your employer—still have to pay Social Security and Medicare taxes on every dollar of that overtime. The "no tax" promise only applies to federal income tax. Your 6.2% for Social Security and 1.45% for Medicare aren't going anywhere.
What to Look for on Your 2026 W-2
Since we are currently in the 2026 tax season, you need to be looking at your W-2 very closely. For the 2025 tax year, the IRS gave employers a bit of a "grace period" on how they reported this because the law passed so late in the year.
But for the 2026 tax year and beyond, the rules are getting stricter.
The IRS has introduced a new code for Box 12 on your W-2. You’ll want to look for Code TT. This is where your employer will report the total amount of "qualified overtime compensation" you earned.
If your employer isn't tracking this separately, you might have to do some manual math or provide your own pay stubs to your tax preparer to make sure you get the deduction you're owed.
The Expiration Date Nobody Mentions
Nothing in the tax world lasts forever. This "no tax on overtime" provision is currently a temporary measure.
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As the law is written right now, these deductions are scheduled to sunset on December 31, 2028.
That gives us a four-year window of relief. Unless Congress acts to extend it, we’ll go back to the old way of taxing the full amount of overtime in 2029. It’s a "use it while you can" situation for folks in Tennessee who are looking to maximize their take-home pay by picking up extra shifts at the warehouse or the hospital.
Actionable Next Steps for Tennessee Workers
To make sure you aren't leaving money on the table, you should take these steps immediately:
1. Check Your Pay Stubs: Look at your most recent stubs. Is your employer clearly labeling "FLSA Overtime"? If it's just lumped into a general "Bonus" or "Other" category, you might have trouble claiming the deduction later.
2. Talk to Payroll: Ask your HR department if they are using the new IRS Code TT for Box 12 reporting. If they seem confused, point them toward the latest IRS guidance on the One Big Beautiful Bill Act.
3. Adjust Your Withholding: Since you won't be paying as much in federal income tax on your overtime, you might be over-withholding. You can use the IRS Tax Withholding Estimator to see if you should update your Form W-4. This could put more money in your pocket every Friday instead of making you wait for a big refund next year.
4. Keep Your Own Records: Don't rely 100% on your company’s software. Keep a simple spreadsheet of your overtime hours and the "premium" pay you earned. If there’s a discrepancy on your W-2, you’ll need that paper trail to get it fixed.