Are Your Overtime Hours Taxed More Than Regular Pay?

Many individuals perceive that overtime hours are “taxed more” due to a noticeable reduction in take-home pay from these earnings. This misunderstanding arises from how income tax withholding is calculated, rather than from the actual tax rates applied to your total earnings.

How Income is Taxed

In the United States, all taxable income—whether from regular hours, overtime, bonuses, or commissions—is combined and subject to a progressive tax rate structure. A progressive system means that as income increases, higher portions are subject to higher marginal tax rates. The federal individual income tax features multiple tax brackets.

Overtime pay is simply additional income; there is no separate, higher “overtime tax rate” imposed by the IRS. All earned income, including overtime, is also subject to federal payroll taxes (Social Security and Medicare, or FICA taxes). State income taxes, where applicable, generally apply to all earned income in a similar progressive manner.

The Role of Income Tax Withholding

Income tax withholding is the amount an employer estimates and deducts from an employee’s paycheck. This system ensures income taxes are paid throughout the year, preventing a large tax bill at year-end. It operates on a “pay-as-you-go” principle, where tax obligations are continuously met as income is earned.

Employers use information from an employee’s Form W-4, such as filing status and dependents, to calculate the appropriate withholding amount for each pay period. This withholding is an estimate of an individual’s annual tax liability, not the final amount owed. The actual tax liability is determined when the individual files their annual income tax return; over-withholding may result in a refund, or under-withholding may require an additional payment.

Why Overtime Withholding Can Appear Higher

The perception that overtime pay is “taxed more” stems from how employers calculate withholding for larger payments like overtime. When a significant amount of overtime pay is added to a regular paycheck, an employer’s payroll system often uses an “annualization” method. This method projects the employee’s current pay period income over an entire year, as if every pay period would be as high as the one with overtime.

This annualization can temporarily push the employee’s projected annual income into a higher withholding bracket for that pay period. Consequently, a larger percentage of that paycheck, including the overtime portion, is withheld for taxes. This increased withholding for a single pay period does not mean the actual annual tax rate on the overtime income is higher. Instead, it is an adjustment in the estimated tax deduction for that pay period, based on a temporary spike in earnings.

At the end of the tax year, all income, including regular wages and overtime, is combined to calculate total annual taxable income. The actual tax owed is determined by progressive tax brackets for this total income. If more tax was withheld than owed due to higher earnings, a refund will be issued. If too little was withheld, an additional payment may be due. Factors such as pay frequency and payroll system algorithms can influence withholding amounts for fluctuating income, but the core reason for the perceived higher taxation of overtime is this annualization of the pay period’s income for withholding.