Do You Get Taxed More If You Work Over 40 Hours?

It is a common question whether working extra hours, particularly overtime, leads to a disproportionately higher tax bill. This article explains the principles of income taxation and how overtime pay is handled, dispelling the notion that simply working more hours inherently results in a greater tax burden on all earned income.

Understanding How Income Tax Works

The federal income tax system in the United States operates on a progressive structure. This means that as an individual’s taxable income increases, higher portions of that income are subject to progressively higher tax rates. There are multiple tax brackets, each corresponding to a specific income range and an associated tax rate. For example, the federal tax system typically features seven income tax rates, ranging from 10% to 37%. It is important to understand that not all of an individual’s income is taxed at the highest rate they reach.

The term “marginal tax rate” refers to the tax rate applied to each additional dollar of income an individual earns. This is the rate of the highest tax bracket into which a taxpayer’s income falls. For example, if an individual’s highest income segment is taxed at 22%, their marginal tax rate is 22%. This structure prevents an entire income from being taxed at the highest applicable rate, which is a common misunderstanding.

This progressive system ensures that individuals with higher incomes contribute a larger percentage of their earnings in taxes, while those with lower incomes face a smaller proportional tax burden. The rates and income thresholds for these brackets are adjusted annually by the Internal Revenue Service (IRS) to account for inflation, ensuring the system remains current.

Taxation of Overtime Pay

Overtime pay is generally treated as ordinary income for federal tax purposes, just like regular wages. There is no separate or unique federal income tax rate applied specifically to overtime hours. Both regular and overtime earnings are combined to determine an individual’s total taxable income for the year. This total income is then subjected to the same progressive tax rates and brackets that apply to all other earned income.

While earning more through overtime can increase an individual’s total annual income, it does not mean that all income, including previously earned regular wages, will be taxed at a higher rate. If additional income from overtime pushes a portion of earnings into a higher tax bracket, only that specific portion of income falling within the new, higher bracket will be taxed at the increased rate.

A recent legislative change, the “One Big Beautiful Bill Act,” enacted a temporary “No Tax on Overtime” provision, effective January 1, 2025, through December 31, 2028. This provision allows eligible individuals to deduct a specific amount of qualified overtime compensation from their federal taxable income. Specifically, workers can deduct up to $12,500 of their qualified overtime pay, with joint filers able to deduct up to $25,000. This deduction applies to the “half” portion of time-and-a-half pay, which is the premium earned for working beyond standard hours.

This deduction is subject to income limitations, phasing out for taxpayers with a modified adjusted gross income exceeding $150,000 for single filers and $300,000 for those filing jointly. While this provision offers a federal income tax deduction, overtime pay remains subject to federal payroll taxes, such as Social Security and Medicare taxes. Employers are required to report qualified overtime compensation separately on tax forms like Form W-2.

Withholding and Your Paycheck

The amount of tax taken out of each paycheck is known as tax withholding. This is an estimate of an individual’s annual tax liability, collected by the employer and remitted to the government on the employee’s behalf. It functions as a pay-as-you-go system for income taxes throughout the year. Actual tax liability, however, is the total amount of tax legally owed for the entire tax year, which is calculated when a tax return is filed.

It is common for employees to observe a larger amount withheld from paychecks that include overtime earnings. This often occurs because payroll systems may annualize the increased income from the overtime period. When the system projects a higher annual income based on a single pay period with overtime, it can place the employee, for withholding purposes, into a higher estimated tax bracket. This results in more taxes being withheld from that particular paycheck.

However, this increased withholding is merely an estimate and does not necessarily reflect the final tax owed for the entire year. If an employer withholds more tax than what is ultimately owed, the employee typically receives the excess amount back as a tax refund after filing their annual tax return. Conversely, if too little is withheld, the employee may owe additional tax.

Individuals can influence the amount of tax withheld from their paychecks by adjusting their IRS Form W-4, also known as the Employee’s Withholding Certificate. This form provides employers with the necessary information to calculate appropriate withholding based on an employee’s filing status, dependents, and other income or deductions. Reviewing and updating this form, especially after significant life changes or if consistently receiving large refunds or tax bills, can help align withholding more closely with actual tax liability.