Do You Pay More Taxes on Overtime?

The perception that overtime earnings are taxed at a higher rate is a widespread misunderstanding, often stemming from larger deductions on overtime paychecks. This article clarifies how overtime income is treated for tax purposes, explaining the difference between tax liability and withholding, and how these amounts are reconciled annually.

How Overtime Income Is Taxed

Overtime income is not taxed at a special higher rate; rather, it is treated as regular income for federal income tax purposes. All wages earned, including overtime pay, are added together to determine an individual’s total taxable income for the year. This total income then falls into various marginal tax brackets, where different portions of income are taxed at increasing rates.

Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes, also apply to overtime earnings. Social Security tax is a flat rate of 6.2% on wages up to an annually adjusted maximum taxable amount. For example, for 2024, this limit is $168,600, meaning any earnings above this threshold are not subject to the Social Security tax. Medicare tax, however, applies to all earned wages without an income limit, at a rate of 1.45%. Individuals earning above certain thresholds, such as $200,000 for single filers, may also be subject to an additional Medicare tax of 0.9% on earnings exceeding that amount. State and local income taxes, where applicable, also treat overtime pay as part of an individual’s total income, applying their respective tax rates.

Understanding Overtime Withholding

A common reason people perceive higher taxes on overtime is due to how employers handle tax withholding from these payments. Withholding is an estimate of your annual tax liability that your employer sends to the Internal Revenue Service (IRS) on your behalf throughout the year. It is important to distinguish this from your actual tax liability, which is determined when you file your annual tax return.

The IRS classifies overtime pay as “supplemental wages.” Employers use one of two methods to calculate federal income tax withholding for supplemental wages. Under the percentage method, if an employee receives supplemental wages separately from regular wages, or if supplemental wages exceed $1,000,000 in a calendar year, the employer may withhold a flat 22% of the supplemental payment. This fixed rate can appear higher than the percentage withheld from regular pay, especially for individuals in lower income tax brackets.

Alternatively, employers may use the aggregate method, combining supplemental wages with regular wages for a pay period and then calculating income tax withholding on the total amount. This combined sum can push the total income for that specific pay period into a higher withholding bracket, leading to a larger percentage of the overall pay, including the overtime portion, being withheld. This higher initial withholding is an estimate to ensure sufficient taxes are paid throughout the year, not an indication that overtime is taxed at a higher rate.

Overtime and Your Annual Tax Return

The final determination of your tax liability for the year occurs when you file your annual tax return, typically using Form 1040. At this point, all your income sources, including regular wages and any overtime earnings reported on your Form W-2, are totaled. Your actual tax liability is then calculated based on your total adjusted gross income, applicable deductions, and available tax credits.

The total amount of federal income tax withheld from all your paychecks throughout the year, including both regular and overtime earnings, is then compared against this calculated actual tax liability. If the total amount withheld by your employer exceeds your actual tax liability, you will receive a tax refund for the difference. Conversely, if less tax was withheld than you actually owe, you will be required to pay the remaining balance to the IRS. The annual tax return serves as the reconciliation point where any over or under-withholding from overtime or regular pay is corrected.