Do You Pay Taxes on Overtime? Here’s How It Works

Overtime pay refers to compensation for hours worked beyond an employer’s standard workweek, 40 hours, at a rate higher than the regular hourly wage. This additional compensation is considered earned income and is generally subject to taxation.

Is Overtime Taxable

Overtime pay is subject to the same taxes as your regular wages, as it is considered ordinary income by the Internal Revenue Service (IRS). This means federal income tax applies to overtime earnings, along with state and potentially local income tax, depending on your residency and work location. Overtime pay is also subject to Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes. These FICA taxes are a fixed percentage of your earnings: 6.2% for Social Security (up to an annual wage base limit) and 1.45% for Medicare, with no wage base limit.

There is no special or higher tax rate applied specifically to overtime pay; it is taxed at your regular marginal income tax rates. A new temporary federal deduction for qualified overtime compensation has been introduced for 2025 through 2028. This applies as a deduction on your tax return, not an exemption from withholding at the time of payment. The perception that overtime is taxed at a higher rate often stems from how taxes are withheld from these payments rather than the actual tax rate itself.

How Overtime Withholding Works

Understanding the distinction between tax liability and tax withholding is important when considering overtime pay. Tax liability represents the actual amount of tax you owe based on your total annual income, while tax withholding is the amount your employer deducts from each paycheck. Employers treat overtime as supplemental wages, which are payments made in addition to an employee’s regular salary or hourly wages, such as bonuses or commissions.

The IRS provides employers with two primary methods for withholding federal income tax from supplemental wages. One method, often used when supplemental wages are identified separately from regular wages, is the percentage method. Under this approach, a flat 22% federal income tax is withheld from supplemental payments up to $1 million within a calendar year. For amounts exceeding $1 million, a mandatory 37% federal income tax withholding rate applies to the excess. This flat rate can sometimes lead to a larger percentage of a single overtime payment being withheld, creating the impression of a higher tax rate.

Alternatively, employers may use the aggregate method, where overtime pay is combined with your regular wages for the pay period. Withholding is then calculated on this total amount as if it were a single regular payment, taking into account your Form W-4 elections. This can result in either over-withholding or under-withholding over the year, which is reconciled when you file your annual tax return.

Overtime and Your Annual Tax Liability

All income earned throughout the year, including both regular wages and overtime pay, is aggregated to determine your total gross income for tax purposes. This cumulative income, after accounting for any applicable deductions and adjustments, establishes your overall taxable income and thus your marginal tax bracket for the year. While earning substantial overtime can increase your total income, potentially pushing you into a higher marginal tax bracket, remember how progressive tax systems operate. Only the portion of your income that falls within that higher bracket is taxed at the increased rate, not your entire income.

For the 2025 tax year through 2028, a new federal provision allows eligible taxpayers to deduct a portion of their qualified overtime compensation. This “No Tax on Overtime” deduction can be up to $12,500 for individual filers and $25,000 for those filing jointly, and it primarily applies to the “half” portion of time-and-a-half overtime pay. This deduction is taken when filing your annual federal income tax return and phases out for taxpayers with higher incomes, such as those earning over $150,000. It is a specific federal income tax deduction and does not impact FICA taxes or state and local income taxes on overtime earnings.

Increased income from overtime can also influence your eligibility for certain tax credits or deductions that have income limitations. As your adjusted gross income rises, some tax benefits may begin to phase out or be completely eliminated. Ultimately, the total amount of tax you owe for the year is determined when you file your tax return, at which point your actual tax liability is reconciled against the amounts that were withheld from your paychecks throughout the year.