At What Rate Is Overtime Income Taxed?

How All Income Is Taxed

The United States employs a progressive tax system for individual income, meaning different portions of an individual’s income are taxed at increasing marginal rates. This structure is designed so that higher earners contribute a larger percentage of their income in taxes. Tax brackets define these specific income ranges, each with an assigned marginal tax rate.

As an individual’s taxable income increases, it moves into higher tax brackets. Only income within that specific bracket is taxed at its corresponding marginal rate. For example, the first portion might be taxed at 10%, the next at 12%, and so on. This system ensures not all of an individual’s income is taxed at their highest marginal rate.

This progressive tax framework applies to all forms of income, regardless of origin. Whether income is derived from salary, hourly wages, investment gains, or other sources, it is aggregated to determine an individual’s total taxable income. The tax brackets and associated rates then apply to this combined income to calculate the overall tax liability.

Overtime Pay and Its Tax Treatment

Overtime pay is regular income, fully includible in an individual’s gross income for tax purposes. When an individual earns overtime, these additional earnings are added to their total wages for the pay period and the entire tax year. Overtime income is not treated as a separate category for taxation.

Overtime pay is not subject to a different or higher tax rate than an individual’s regular wages. Once added to all other income, it becomes part of the total taxable income subject to the same progressive tax rates and brackets discussed earlier. All of an individual’s income, including overtime, is taxed according to the federal income tax schedule.

While the payment rate for overtime work is often higher (typically one and a half times the regular hourly rate), this increased pay rate is distinct from the tax rate applied. The higher payment rate compensates for additional hours worked or for working outside standard schedules. The tax treatment of these earnings remains consistent with all other earned income.

Withholding on Overtime Pay

The common perception that overtime income is taxed at a higher rate stems from how taxes are withheld, rather than the actual tax rate applied. Overtime pay falls under supplemental wages, which include bonuses, commissions, severance pay, and other irregular payments. Employers must withhold federal income tax from these supplemental wages.

The Internal Revenue Service (IRS) provides employers with two methods for withholding federal income tax from supplemental wages. One common approach is the percentage method (also known as the flat rate method). If supplemental wages are separately identified from regular wages, employers can withhold a flat 22% for federal income tax from these amounts, provided total supplemental wages paid to an employee during the calendar year do not exceed $1 million.

Alternatively, employers may use the aggregate method, especially if supplemental wages are not separately identified from regular wages or exceed the $1 million threshold. The employer combines supplemental wages with regular wages for the current pay period. Taxes are then calculated and withheld on this combined amount as if it were a single, larger regular wage payment. This can result in a higher amount being withheld from that paycheck, as the larger periodic income might push a portion into a higher withholding bracket.

The amount withheld from a paycheck, whether for regular or overtime pay, is merely an estimate of an individual’s final tax liability. This estimated withholding ensures taxpayers remit taxes throughout the year, rather than facing a large tax bill at once. The actual tax rate on all income, including overtime, is determined during the annual tax filing process.

Determining Your Final Tax Obligation

An individual’s true tax rate for all income, including overtime earnings, is not set until they file their annual income tax return. All sources of income earned throughout the year—regular wages, overtime pay, bonuses, and other earnings—are aggregated to calculate total gross income. From this total, various deductions and credits are applied based on eligibility and filing status.

Deductions reduce the amount of income subject to tax, while credits directly reduce the amount of tax owed. Once calculations are complete, the actual tax liability for the year is determined. This reveals the true effective tax rate on all income earned.

If total taxes withheld from paychecks throughout the year exceed the final tax liability, the individual will receive a tax refund. Conversely, if the amount withheld was less than the actual tax owed, the individual will pay the remaining balance. While withholding on overtime may appear higher in individual paychecks, the ultimate tax burden is reconciled at tax filing time.