PayrollOrg Comments on Missouri Overtime, Income Tax Reduction Bill

PayrollOrg’s Government Relations Task Force State and Local Topics Subcommittee offered concerns and recommendations in May about Missouri S.B. 452, which would allow a deduction from federal adjusted gross income equal to the overtime compensation a taxpayer receives during a year. Specifically, the bill would add a new exclusion from state income tax of: “One hundred percent of the amount of any income received by a taxpayer as overtime compensation.”

PayrollOrg asked state legislators to clarify whether the exemption would apply to both the straight time (regular pay rate) and premium rate (50% of the regular rate) for eligible hours worked over 40 in a workweek. Otherwise, courts might interpret the exemption to apply only to the 50% overtime premium component.

Impact on Payroll Calculations

Tax changes based on overtime pay would affect payroll calculations in Missouri, PayrollOrg said. For example, employers would be required to reduce Missouri taxable wages by the amount of any exempt overtime earnings before calculating tax withholding. In turn, the reduced taxable wages must be reported on the employee’s Form W-2, Wage and Tax Statement.

Alternatively, it could be an adjustment that individual taxpayers would make at year-end, but this may result in overwithholding and large refund amounts. Instructions for calculating taxable wages could be clarified in the proposed bill or by the Missouri Department of Revenue (DOR) in related forms and instructions.

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Alice P. Jacobsohn, Esq., is Director of Government Relations at APA.