Does Colorado Tax Your Tips and Overtime in 2026?

Most states that skip the OBBBA's tips and overtime deductions do it by simply not acting — no new law, no addback, just leftover default treatment. Colorado did something more deliberate: its income tax starts from federal taxable income, so both new federal deductions flowed through automatically the moment OBBBA passed. Then Colorado lawmakers voted to specifically shut the overtime deduction back off, while leaving the tips deduction alone.

Quick answer

As of July 2026, Colorado conforms to the federal tips deduction — no addback needed — but does not conform to the overtime deduction. Under House Bill 25-1296, Colorado taxpayers must add the federal overtime deduction back on their state return for tax years 2026 and later, even though the tips deduction passes through untouched. Colorado charges a flat 4.4% income tax rate on whatever is left after the addback.

Does Colorado tax tips under the OBBBA?

No addback required. Colorado's income tax return starts from your federal taxable income, and lawmakers didn't pass any legislation decoupling from the tips deduction — so the qualified tips you exclude federally under the OBBBA stay excluded on your Colorado return too. This is one of the few areas where Colorado's tax code moves automatically with new federal law rather than needing the legislature to opt in.

According to this site's state conformity tracker, Colorado is marked conformed for tips and not conformed for overtime. See the full detail on the Colorado state page.

Does Colorado tax overtime pay?

Yes. For tax years 2026 and later, Colorado requires a full addback of the federal overtime deduction under House Bill 25-1296 — meaning the FLSA overtime premium (the extra half-time portion of time-and-a-half pay, up to $12,500 single/head of household or $25,000 married filing jointly federally) is tax-free on your federal return but fully taxable again on your Colorado return, at the flat 4.4% rate.

That's true no matter how large your federal deduction is, and FICA payroll tax — 6.2% for Social Security plus 1.45% for Medicare — still applies to every overtime dollar regardless of either deduction. The OBBBA deductions only ever reduce income tax; they never touch payroll tax.

Why Colorado only decoupled from the overtime deduction

Colorado's legislature estimated that automatically absorbing both new federal deductions would cost the state meaningfully more revenue than it wanted to give up. Rather than decoupling from both, HB 25-1296 targeted only the overtime deduction, which analysts estimate saves Colorado's budget roughly $119 million in 2026 alone. Tips were left conformed, likely because tipped income is concentrated among lower earners and the revenue impact is smaller.

That's a different story than Illinois or Pennsylvania, where neither deduction was ever automatically linked and no action has been taken either way — see does Illinois tax tips and overtime. In Colorado, non-conformity on overtime was a specific, itemized legislative choice with a published fiscal cost, not a default.

Marcus bartends in Denver, earning $34,000 in wages plus $10,000 in qualified tips and $4,000 in FLSA overtime premium. He deducts both federally under the OBBBA and owes no federal income tax on either. On his Colorado return, the $10,000 in tips stays deducted — no addback — but he must add the $4,000 overtime deduction back and pay 4.4% state tax on it: $176. His tips are effectively tax-free at both levels; his overtime premium isn't.

How to plan for Colorado tax on your tips and overtime

If you regularly work FLSA overtime in Colorado, budget for the 4.4% state addback separately from your tips — most payroll withholding systems don't automatically separate the two, so the gap can show up as a smaller state refund or a balance due rather than a paycheck-level surprise. If you're self-employed or receive both tips and overtime, only the overtime portion needs the extra planning. For the multi-state comparison, see the roundup of state tax rules for tips and overtime, and run your exact numbers with the Tips & Overtime Calculator.

Frequently asked questions

Does Colorado tax tips under the OBBBA?

No addback is required. Colorado conforms to the federal qualified tips deduction, so tips you exclude from federal taxable income stay excluded on your Colorado return as well.

Does Colorado tax overtime pay under the OBBBA?

Yes. Under House Bill 25-1296, Colorado requires taxpayers to add the federal overtime deduction back on their state return for tax years 2026 and later, so the FLSA overtime premium is fully taxable at Colorado's flat 4.4% rate even though it's deducted federally.

Why does Colorado treat tips and overtime differently?

Colorado's tax code generally follows federal taxable income automatically, so both deductions initially applied at the state level without any new law. Lawmakers then passed HB 25-1296 to specifically decouple from the overtime deduction, estimated to preserve about $119 million in state revenue in 2026, while leaving the tips deduction conformed.

Could Colorado decouple from the tips deduction too in the future?

It's possible. Conformity status is set by the legislature and can change in any session. Check this site's state conformity tracker periodically for the current status of both deductions.

How much extra state tax will I owe on my Colorado overtime?

Multiply your FLSA overtime premium — the amount you deduct federally under the OBBBA — by 4.4%. A worker with $8,000 in qualified overtime owes about $352 in Colorado state tax on that income that the federal deduction doesn't cover. Tips need no such calculation, since Colorado doesn't require an addback for them.

Sources

This site's state conformity tracker (last verified July 13, 2026); Colorado Department of Revenue, Income Tax Topics: State Income Tax Addback; Colorado Department of Revenue, January 2026 Tax Policy Updates; Institute on Taxation and Economic Policy, Linking to Tipped and Overtime Income Deductions Would Worsen State Shortfalls. Conformity status can change — verify current figures with the Colorado Department of Revenue directly.

This article is general information, not tax advice. The figures and rules are estimates based on current IRS and Colorado Department of Revenue guidance and can change. For your situation, consult a qualified tax professional or the Colorado Department of Revenue directly. Last reviewed July 21, 2026.