Do You Get Taxed on Overtime Pay?

In the United States, nearly all earned income, including wages, salaries, and additional compensation, is subject to taxation. This system collects revenue for public services. Understanding how your income is taxed is important for managing personal finances.

Overtime as Taxable Income

Overtime earnings are considered ordinary income, just like regular wages, and are fully subject to income taxes. These additional hours contribute to your total gross income for the pay period and the year.

When you earn overtime, it increases your overall taxable income. This rise can sometimes push a portion of your earnings into a higher marginal tax bracket, affecting the rate at which your highest dollars earned are taxed.

Federal Income Tax and Overtime

The U.S. federal income tax system operates on a progressive scale, meaning different portions of your income are taxed at increasing rates. This system uses tax brackets, where specific income ranges correspond to particular tax percentages. Your marginal tax rate is the rate applied to your last dollar earned, while your effective tax rate is the total tax paid divided by your total taxable income.

Overtime income, considered supplemental wages by the IRS, is added to your regular wages when determining your total taxable income. This can result in a higher marginal tax rate being applied to your highest earnings, including the overtime portion. For example, if your regular pay keeps you in a 12% bracket, but your overtime pushes some income into the 22% bracket, that specific portion of your overtime will be taxed at 22%.

Employers withhold federal income tax from supplemental wages. This withholding calculation can sometimes make it appear as though your overtime is taxed at a much higher rate on a single paycheck. This is because the withholding system attempts to estimate your annual tax liability based on the increased income for that pay period. However, this is merely a withholding adjustment to ensure enough tax is collected throughout the year, and it does not necessarily mean your actual year-end tax rate on overtime is higher. The actual tax owed is reconciled when you file your annual income tax return.

Other Taxes on Overtime

Overtime earnings are also subject to other mandatory taxes, including Federal Insurance Contributions Act (FICA) taxes. FICA taxes fund Social Security and Medicare programs and are applied at a flat rate to most earned income, including overtime.

For 2024, the Social Security tax rate is 6.2% for employees, applied to earnings up to a wage base limit of $168,600. The Medicare tax rate is 1.45% for employees, with no wage base limit, meaning it applies to all earned income. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately.

Many states also impose their own income taxes, and overtime income is subject to these state taxes as well. State income tax rates and regulations vary considerably across the country. Some states have progressive tax systems similar to the federal government, while others have flat tax rates or no state income tax at all. These state taxes are typically withheld from your paycheck alongside federal taxes.

Understanding Your Paystub and Tax Documents

To understand how taxes are applied to your overtime, reviewing your paystub is a practical step. A typical paystub will show your gross pay, which is your total earnings before any deductions, and will often separate regular wages from overtime pay. Below your gross pay, you will find itemized deductions for various taxes.

You should see deductions for “Federal Income Tax” or “FIT,” “Social Security,” and “Medicare.” If your state has an income tax, there will also be a deduction for “State Income Tax” or “SIT.” Comparing these amounts to your gross pay, especially in pay periods with significant overtime, can help you see the impact of these earnings on your tax withholdings.

At the end of the year, your employer will provide you with a Form W-2, Wage and Tax Statement. This document summarizes your annual earnings and the taxes withheld. Box 1, “Wages, tips, other compensation,” includes all your taxable earnings for the year, including any overtime pay. Boxes 2, 4, and 6 will show the total federal income tax, Social Security tax, and Medicare tax withheld, respectively. This form is important for filing your annual tax return and reconciling any differences between the tax withheld and your actual tax liability.