Common Mistakes to Avoid
Don't let tax jargon confuse your 2026 financial planning. Here is what most workers get wrong about the new overtime rules.
1. Deduction vs. Tax Credit
A deduction reduces how much of your income is subject to tax, while a credit is a dollar-for-dollar reduction of the tax bill itself.
2. Forgetting FICA & Payroll Taxes
The "OBBBA" and similar 2026 proposals target the Federal Income Tax. However, mandatory payroll taxes (FICA) generally still apply to all wages.
- Social Security (6.2%): Typically still withheld from overtime.
- Medicare (1.45%): Typically still withheld from overtime.
3. Ignoring State Tax Conformity
This is a big one. Even if the federal government makes overtime "tax-free," your state might not. Unless your state legislature passes a matching bill, you may still owe state income tax on those extra hours.
Check your state's tax status →4. Federal Income Caps
The tax-free benefit is usually capped (e.g., at $12,500 for single filers). Once your overtime earnings pass that limit, every subsequent dollar is taxed at your regular federal rate.
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