The One Big Beautiful Bill Act (OBBBA) provides a temporary exemption of federal income taxation of overtime pay. This exemption applies only to the overtime premium. This provision is retroactive to January 1, 2025, and expires on December 31, 2028. Employers will still withhold federal income tax and social security and Medicare taxes. Taxpayers are responsible for deducting the amount on their individual tax returns.
Colorado Law, Lawsuit
Legislation passed in Colorado adds the amount of any overtime compensation excluded or deducted from an individual’s federal gross income to the individual’s taxable income for Colorado tax purposes [H.B. 1296, L. 2025].
Colorado is one of the states that uses federal gross income as a starting point for state personal income tax purposes. Colorado is the first state that has passed this type of legislation in response to the OBBBA. Advance Colorado, an advocacy group, has filed a lawsuit arguing that H.B. 1296 violates the state constitution.
Colorado Ballot Proposal
In reaction to H.B. 1296, a proposed ballot initiative would preserve the overtime compensation exclusion for state tax purposes [Colorado Ballot Proposal #119]. The ballot proposal needs to be finalized to appear on the ballot for the 2025 election in November and then passed by voters before it can take effect.
OBBBA Webinar
The OBBBA contains many provisions that will affect payroll for years to come. Many questions remain on how to handle provisions from the bill.
Register for PayrollOrg’s “Key OBBBA Payroll Impacts for 2025 and Beyond” on-demand webinar to learn how OBBBA provisions will impact payroll. The on-demand webinar includes a handout that provides answers to attendees’ questions asked during the live webinar.
Interested in more state and local payroll coverage? PayrollOrg’s PayState Update eNewsletter is perfect for you.
Lia Coniglio, Esq., is Managing Editor of PayState Update and Senior Manager of State Payroll Information Resources for PayrollOrg.
