Republican Lawmakers Propose Income Tax Exclusion for Overtime Pay

By Debbie Tam, CPP, Checkpoint

On July 8, 2024, Representative Russ Fulcher (R-ID) introduced a bill (H.R. 8938) that seeks to eliminate income taxes on overtime compensation. The bill entitled the “Keep Every Extra Penny Act of 2024” (KEEP Act) proposes a new provision that would specifically provide a gross income exclusion for overtime compensation that is required under the Fair Labor Standards Act (FLSA). **Overtime requirements under the FLSA. **Under 29 USC 207, employers are required to pay workers overtime for hours worked in excess of 40 hours per workweek. Employees covered by these overtime requirements are referred to nonexempt employees. Such workers do not need to be necessarily paid on an hourly basis and can be paid on a salaried basis. Overtime pay would be paid at one and one-half times of the regular rate of pay. The FLSA provides for an exemption for white collar workers known as the Executive, Administrative, and Professional (EAP) exemption and some other limited exceptions. **Proposed legislation. **The bill carves out a new exclusion from gross income amounts received for overtime compensation as required under 29 USC 207. Under the proposal, the overtime pay exclusion impacts only federal income tax and overtime pay would continue to be subject to Social Security, Medicare, and unemployment taxes. **Similar to Alabama law. ** The bill mirrors an Alabama law that took effect on January 1, 2024, that excludes overtime pay from state income tax. The original bill specified that only full-time hourly employees were eligible for the exclusion. Subsequently, Alabama legislators amended the law to clarify that any amounts received for overtime as required under the FLSA would be eligible for the exclusion. The change was made to include certain workers that were previously excluded based on the hourly worker requirement. By tying the exclusion to the FLSA overtime requirements, workers such as public safety employees and other workers who are paid on a salaried basis that were previously ineligible are now eligible for income exclusion. The Alabama exemption is temporary and only available for tax years that begin after December 31, 2023, and end prior to June 30, 2025. **Response to labor shortage. **The House bill was proposed in response to an ongoing labor shortage, a similar reasoning as the Alabama law.  Representative Fulcher said: “Our nation is facing unprecedented challenges due to workforce shortages and continued high inflation levels. Millions of Americans are looking for financial relief… By eliminating income taxes from overtime pay we can help alleviate this burden for hardworking folks by letting them keep more of what they earn while continuing to safeguard government programs such as Medicare and Social Security.” **Current bill status. ** Since its introduction, the bill has found three additional co-sponsors, indicating growing Republican support. The bill has been referred to the House Committee on Ways and Means.