Does Vermont tax tips and overtime?

The federal deduction and the Vermont deduction are separate questions. Here is where Vermont actually lands, and why.

How Vermont builds its tax base

Vermont starts from your federal adjusted gross income. Both deductions are below-the-line — they reduce federal taxable income but leave AGI untouched — so neither reaches this state's return automatically. Anything you get here had to be legislated separately.

Tips in Vermont

Still taxed

Vermont DID update conformity but at a level that cannot reach these deductions. Act 164 of 2026 (signed June 18, 2026), Sec. 60, amended 32 V.S.A. Sec. 5824 to move Vermont's static conformity date to the IRC as in effect December 31, 2025, retroactive to tax years beginning on or after January 1, 2025 — so OBBBA is in Vermont's IRC. But the Department of Taxes describes the effect precisely: conformity governs 'Vermont's calculation of adjusted gross income for individuals and federal taxable income for corporations.' Vermont's individual base is AGI-based (AGI reduced by the Vermont standard deduction and personal exemption), and IRC Sec. 224 is below-the-line, so it never enters. Confirming this: Vermont's retroactive TY2025 decoupling list contains only IRC Sec. 174A, Sec. 168(n) and Sec. 250 — no tips item, because none was needed.

Source: Vermont Department of Taxes, 'Now Available: Instructions for VT Tax Conformity with OBBBA' (June 22, 2026) and the 2025 Vermont Income Tax Form Instructions Federal Conformity Supplement (Rev. 6/26) · last reviewed August 24, 2026

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Overtime in Vermont

Still taxed

Same mechanism. Act 164 of 2026 conforms Vermont to the 12/31/2025 IRC for purposes of computing individual adjusted gross income, which IRC Sec. 225 does not reduce. The Act's new Vermont addition/subtraction modifications (Sec. 55) create selective nonconformity only for IRC Sec. 174A, Sec. 168(n) and Sec. 250; no overtime addback or subtraction was enacted because the below-the-line overtime deduction never reduced the Vermont base to begin with.

Source: Vermont Department of Taxes, 2025 Vermont Income Tax Form Instructions Federal Conformity Supplement (Act 164 of 2026, Secs. 55 and 60; 32 V.S.A. Sec. 5824) · last reviewed August 24, 2026

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Vermont overtime that does not qualify federally

Yes — by coverage, not by daily hours. Vermont's own overtime law (21 V.S.A. Sec. 384(b)) reaches employers 'employing two or more employees,' far broader than the FLSA's enterprise-coverage tests, so an employee of a small Vermont business below the FLSA's $500,000 threshold can be owed time-and-a-half under Vermont law alone. That premium is not required by FLSA section 7 and therefore is NOT 'qualified overtime compensation' under IRC Sec. 225. Vermont has NO daily and no 6th/7th-day overtime rule — the trigger is 40 hours in a workweek. Note the reverse gap too: Vermont exempts retail or service establishments, hotels/motels/restaurants, amusement or recreational establishments, hospitals/nursing homes and certain transportation employers from its own overtime law, though FLSA-covered employees in those industries still get federal (and therefore qualifying) overtime.

Whatever your state does, your payroll taxes do not change

Both deductions reduce income tax only. Social Security and Medicare are still charged on the same wages, in every state.

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