Do You Get Taxed for Overtime? The New Rules

Overtime pay often raises questions about its tax treatment, leading many to wonder if it is taxed differently than regular wages. The principles governing how overtime is taxed are generally consistent with how all wages are treated for tax purposes.

Fundamental Principles of Overtime Taxation

Overtime pay is considered part of an employee’s gross income and is subject to the same types of taxes as regular earnings. There is no special “overtime tax rate” that is inherently higher than the tax rate on standard pay. Instead, overtime earnings are simply added to your regular wages, and the total amount is then subject to applicable taxes.

Several types of taxes apply to all earned income, including overtime. Federal income tax is a primary component, which operates under a progressive tax system. This means different portions of your income are taxed at increasing rates as your total income rises. For example, if overtime pushes your total earnings into a higher tax bracket, only the income falling within that higher bracket is taxed at the increased rate, not your entire income.

In addition to federal income tax, Federal Insurance Contributions Act (FICA) taxes are withheld from your pay. FICA taxes fund Social Security and Medicare programs. Social Security tax is 6.2% for employees, applied up to an annual wage base limit, which is $176,100 for 2025. Medicare tax is 1.45% for employees, applied to all covered wages without a wage base limit.

Some higher earners may also be subject to an Additional Medicare Tax of 0.9% on wages exceeding certain thresholds, such as $200,000 for single filers. Beyond federal taxes, state and local income taxes may also apply, depending on where you reside and work.

A new temporary deduction for qualified overtime compensation has been introduced for tax years 2025 through 2028. Individuals can deduct up to $12,500 ($25,000 for joint filers) in qualified overtime compensation from their federal taxable income. This deduction is taken when filing annual tax returns and does not affect how FICA taxes are applied to overtime. This deduction phases out for higher earners, starting at a modified adjusted gross income of $150,000 for single filers and $300,000 for joint filers.

How Overtime Affects Your Tax Withholding

Employers are responsible for withholding taxes from employee paychecks, and they use information from your Form W-4 to estimate the correct amount. This form, the Employee’s Withholding Certificate, helps employers calculate how much federal income tax to deduct based on your filing status, dependents, and any additional income or deductions you anticipate.

When an employee works a significant amount of overtime in a single pay period, the employer’s payroll system often annualizes that higher income for withholding purposes. This means the system projects your earnings over a full year based on that single, higher paycheck. As a result, a larger percentage of tax might be withheld from that specific check, creating the perception that overtime is taxed at a higher rate. This increased withholding is an estimate designed to ensure sufficient taxes are paid throughout the year.

Withholding is an estimate of the taxes you will owe. Your actual tax liability is determined when you file your annual tax return, based on your total annual income, deductions, and credits. If too much was withheld due to substantial overtime, you may receive a tax refund. Conversely, if too little was withheld, you might owe additional tax when you file your return. Adjustments to your Form W-4 can help align your withholding more closely with your actual tax liability, potentially reducing large refunds or amounts due.

Understanding Your Paystub and Overall Tax Impact

Your paystub provides a detailed breakdown of your earnings and deductions for a specific pay period. The paystub typically displays your gross pay, which is your total earnings before any taxes or other deductions are applied. This gross pay figure includes both your regular wages and any overtime compensation earned.

Beneath the gross pay, you will find itemized deductions for federal income tax withheld, state income tax withheld (if applicable), and FICA taxes, which consist of Social Security and Medicare contributions. These deductions are subtracted from your gross pay to arrive at your net pay, also known as take-home pay, which is the amount you actually receive.

At the end of the tax year, your total annual income and the cumulative amount of taxes withheld are reconciled when you file your federal income tax return, typically using Form 1040. This process compares your actual tax liability, calculated based on your total gross income, deductions, and credits for the entire year, against the total amount of taxes that were withheld from your paychecks throughout the year. If the total amount withheld exceeds your actual tax liability, you will receive a refund. Conversely, if your withholdings were less than your final tax obligation, you will owe additional tax. This year-end reconciliation clarifies the overall tax impact of your earnings, including overtime.