New overtime, minimum wage & payroll law changes small businesses must know in 2026

Published Thursday 2 July 2026

Table of contents

• Has the federal minimum wage changed in 2026?
• What changed in federal employment law?
• How no tax on overtime works
• Federal minimum wage vs state minimum wage
• What small business owners should do now
• How software reduces compliance risk
• Get started with Xero
• FAQs on federal minimum wage and overtime

Key takeaways

• The federal minimum wage remains $7.25 per hour in 2026, unchanged since 2009, but more than 20 states increased their rates this year.
• The overtime tax deduction, signed into law as part of the One Big Beautiful Bill Act of 2025, lets eligible W-2 employees deduct up to $12,500 in overtime premium pay from their federal income taxes through 2028.
• The federal overtime exemption salary threshold stays at $684 per week ($35,568 per year) after courts blocked a proposed increase, so you should review any employee classifications made in anticipation of the higher threshold.
• Payroll software that tracks state-specific minimum wages, overtime calculations, and the new tax deduction helps you stay compliant and avoid costly errors.

Has the federal minimum wage changed in 2026?

No, the federal minimum wage hasn't changed in 2026. It's still $7.25 per hour, a rate set by Congress in 2009. That makes it the longest stretch without a federal increase since the minimum wage was first enacted in 1938.

As of 2026, 20 states and 1 territory still use the federal minimum wage, while 34 states, territories, and Washington D.C. set higher local rates. If you have employees in multiple states, it's worth checking each location's current rate to make sure you're paying correctly.

Learn more on the US Department of Labor (DOL) page on wages.

What changed in federal employment law?

There were no significant changes to federal labor laws in 2026. The most important rules for employers to know continue to be:

• Minimum wage: employers must pay all employees covered under the Fair Labor Standards Act (FLSA) at least the federal minimum wage
• Tipped wage: employers may pay the tipped minimum wage to employees who receive tips, but the hourly rate, including base pay and tips, must be at least the standard minimum wage
• Overtime: you must pay overtime at a rate of 1.5 times the employee's usual hourly rate if they work more than 40 hours in a 7-day period, unless they qualify for an exemption. You can choose which 7-day period to use, but it must stay consistent through the year.
• Exempt salary minimum: executive, administrative, and professional employees are exempt from overtime rules, as long as they earn at least $684 per week, equivalent to an annual salary of $35,568
• Minimum salary or hourly rate for computer workers: skilled computer workers such as programmers, analysts, and software engineers are also exempt from overtime rules. However, they can be paid a salary or hourly rate at a minimum of $684 per week or $27.63 per hour.
• Outside sales exemption: salespeople who customarily perform sales outside of their employer's main place of business are also exempt from minimum wage and overtime rules, with no minimum salary requirements

Keep in mind that state laws vary. Although there were no significant changes to federal law, you may need to update practices based on changes to state or local labor or wage laws.

To help you learn more, the DOL has an overview of overtime and links to general guidance on overtime.

DOL overtime rule: what changed and why it matters

In 2024, the Department of Labor proposed raising the minimum salary for overtime-exempt employees from $684 per week to $1,128 per week ($58,656 per year). The rule aimed to extend overtime protections to millions of lower-paid salaried workers.

However, a federal court blocked the rule before it could take effect. The Trump administration then withdrew the appeal, and the DOL abandoned its effort to raise the threshold. As a result, the exempt salary minimum remains at $684 per week ($35,568 per year), the threshold set in 2019.

It's worth noting that meeting the salary threshold alone doesn't make an employee exempt. Each worker must also pass a duties test, meaning their primary responsibilities must align with executive, administrative, or professional functions as defined by the FLSA. If you've reclassified employees based on the proposed rule, review those decisions now to confirm they still meet the current threshold and duties requirements.

How no tax on overtime works

From tax year 2025 to 2028, eligible taxpayers can claim an income tax deduction on the premium portion of overtime pay. The maximum deduction is $12,500 per year ($25,000 if married filing jointly). This provision, commonly referred to as "no tax on overtime," was signed into law as part of the One Big Beautiful Bill Act of 2025.

Who qualifies for the overtime tax deduction

The deduction is available to W-2 employees who receive overtime pay under the FLSA or equivalent state laws. It applies to the premium portion of overtime, not the base rate.

Self-employed individuals, independent contractors, and gig workers don't qualify. The deduction also doesn't apply to salaried employees who are exempt from overtime rules, since they don't receive overtime pay.

How the deduction works

The deduction applies only to the premium portion of overtime pay, not the full overtime rate. For example, if an employee earns $20 per hour and works 5 overtime hours in a week, the overtime rate is $30 per hour. The premium portion is $10 per hour (the difference between the overtime rate and the base rate).

In this case, the employee's deductible amount for that week is $50 (5 hours x $10 premium). Over a full year, the deduction is capped at $12,500 for single filers.

What to update in your payroll system

Make sure your payroll software has updated to reflect this change in the tax code. It should factor in the deduction when calculating tax on employee payments. Your system should also be ready to report overtime payments on employees' W-2s at the end of the year, since the IRS requires clear identification of overtime premium amounts.

If your software doesn't support automatic calculations for this deduction, check with your provider for updates. Getting this right now avoids issues during year-end filing.

Federal minimum wage vs state minimum wage

States may set their own minimum wage laws. If the state minimum wage rate is higher than the federal rate, employers must pay the state rate. If a state has a lower minimum wage on the books or doesn't have one at all, like Louisiana, employers must use the federal minimum wage if their employees are covered under the FLSA. There are rare exceptions, but most employees are covered under these rules.

Here are the hourly minimum wage rates in the states that don't use the federal minimum wage, based on the DOL's state minimum wage table, along with notes about which states increased their rates in 2026 and scheduled increases:

• Alaska: $13, increases to $14 July 1, 2026
• Arizona: $15.15 (updated January 1, 2026)
• Arkansas: $11
• California: $16.90 (updated January 1, 2026)
• Colorado: $15.16 (updated January 1, 2026)
• Connecticut: $16.94 (updated January 1, 2026)
• Delaware: $15
• District of Columbia: $17.95, increases to $18.40 July 1, 2026
• Florida: $14, increases to $15 on September 30, 2026
• Hawaii: $16 (updated January 1, 2026), increases to $18 January 1, 2028
• Illinois: $15
• Maine: $15.19 (updated January 1, 2026)
• Massachusetts: $15
• Michigan: $13.73 (updated January 1, 2026), increases to $15 January 1, 2027
• Minnesota: $11.41 (updated January 1, 2026)
• Missouri: $15 (updated January 1, 2026)
• Montana: $10.85 (updated January 1, 2026)
• Nebraska: $15 (updated January 1, 2026); youth rate $13.50 for 14 to 15 year olds and for 16 to 19 year olds during a 90-day training period effective July 1, 2026
• Nevada: $12
• New Jersey: $15.92
• New Mexico: $12
• New York: $17 in New York City, Long Island, and Westchester; $16 in the rest of the state (updated January 1, 2026)
• Ohio: $11 (updated January 1, 2026)
• Oregon: $14.05 non-urban areas, $15.05 standard rate, and $16.30 Portland. Rate increases take effect annually on July 1.
• Rhode Island: $15 (updated January 1, 2026)
• South Dakota: $11.85 (updated January 1, 2026)
• Vermont: $14.42 (updated January 1, 2026)
• Virginia: $12.77 (updated January 1, 2026)
• Washington: $17.13 (updated January 1, 2026)

Many states have a lower minimum rate for tipped employees. If the state uses the federal minimum wage, the tipped minimum is $2.13 per hour. States that set their own minimum tipped rate usually use a rate that's about $3 or $4 lower than the state minimum.

In both cases, employers must make sure that tips bring employees up to the minimum wage rate, or they must pay the difference. For example, in a state that uses the federal minimum wage, an employee must receive the base rate of $2.13 and at least $5.12 in tips per hour to reach the minimum hourly rate of $7.25. Otherwise, you must make up the shortfall.

What small business owners should do now

Even without major federal changes in 2026, it's a good time to review your compliance practices. Use this checklist to make sure you're covering the basics:

• Confirm that the work location for each employee is correct in your payroll system, especially if anyone has moved or changed their primary work state.
• Check whether any states where you have employees increased their minimum wage in 2026, and update rates in your payroll software if they haven't automatically adjusted.
• Review overtime-exempt classifications to confirm that each exempt employee meets both the $684 per week salary threshold and the duties test.
• Verify that your payroll system accounts for the new overtime tax deduction and can report overtime premium amounts on W-2s.
• Audit tipped employee pay records to confirm total hourly compensation (base pay plus tips) meets or exceeds the applicable minimum wage.
• Set a calendar reminder to check for mid-year minimum wage increases in states like Alaska, D.C., Florida, Nebraska, and Oregon.

How software reduces compliance risk

Keeping up with federal and state employment law takes time, especially when rates and rules change at different points in the year. Payroll compliance software helps you stay on top of these changes and reduces the risk of costly errors.

Here's how the right software supports your compliance efforts:

• tracking employee hours and flagging when overtime applies based on federal or state-specific thresholds
• calculating overtime rates using the standard 1.5x rules, including the new overtime tax deduction for W-2 reporting
• updating minimum wage rates automatically when states change their rates, so you don't have to monitor each state manually
• calculating payroll taxes based on the most recent federal and state laws, including mid-year adjustments
• generating reports that flag mismatches between employee classifications and salary thresholds, helping you catch exempt-status errors before they become audits

For businesses with employees across multiple states, automation is especially valuable. Rather than tracking each state's rules individually, payroll software applies the correct rate for each employee's work location and adjusts when those rates change.

Get started with Xero

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FAQs on federal minimum wage and overtime

Federal minimum wage and overtime rules affect every employer. Here are answers to common questions.

What is the federal minimum wage in 2026?

The federal minimum wage is $7.25 per hour, unchanged since 2009. However, 34 states, territories, and Washington D.C. have set higher rates. If your state's rate is higher, you must pay the state rate instead.

Has no tax on overtime become law?

Yes. The One Big Beautiful Bill Act of 2025 introduced an income tax deduction on the premium portion of overtime pay, effective from tax year 2025 through 2028. Eligible W-2 employees can deduct up to $12,500 per year ($25,000 if married filing jointly). Make sure your payroll system reflects this change for accurate tax withholding and W-2 reporting.

What is the salary threshold for overtime exemption?

The federal minimum salary for overtime-exempt employees is $684 per week, or $35,568 per year. The DOL's 2024 proposal to raise this threshold to $1,128 per week was blocked by a federal court, and the current administration has withdrawn the appeal. Employees must also meet a duties test for the exemption to apply.

Does federal or state minimum wage apply if both exist?

The higher rate applies in nearly all cases. For example, 3 states have a lower minimum wage than the federal rate: Georgia ($5.15), Oklahoma ($2.00), and Wyoming ($5.15). But employers in those states must still pay the federal $7.25 minimum unless they're exempt from FLSA requirements. In states with higher rates, you pay the state rate.