Does Overtime Get Taxed at a Higher Rate?

Individuals often wonder if their overtime wages are subject to a higher tax rate than their regular pay. This perception can arise from observing a larger portion of their overtime pay withheld for taxes. While it might appear that way on a paycheck, the underlying tax principles for overtime compensation are generally the same as for regular wages. This article clarifies how overtime is treated for tax purposes, explaining the federal tax system and the nuances of tax withholding that lead to this common misunderstanding.

Understanding Progressive Tax Brackets

The United States employs a progressive income tax system, where higher income is taxed at progressively higher rates. Income is divided into tax brackets, each with its own rate. For 2025, federal income tax rates range from 10% to 37%, applied across different income thresholds. This structure ensures taxpayers do not pay a single rate on their entire income.

The marginal tax rate is the rate applied to each additional dollar of income earned. When income crosses into a new tax bracket, only the portion within that higher bracket is taxed at the new rate. Income in lower brackets continues to be taxed at their lower rates. This graduated approach means that moving into a higher bracket does not subject all earnings to that higher rate.

How Overtime Wages Are Taxed

Overtime wages are ordinary income, added to regular earnings for federal income tax. There is no separate or higher tax rate specifically applied to overtime pay. Overtime income is combined with all other taxable income and subjected to the same progressive tax brackets as regular wages.

Overtime earnings are also subject to federal payroll taxes, Social Security and Medicare (FICA) taxes. For 2025, the Social Security tax rate is 6.2% for both the employee and employer, up to a wage base limit of $176,100. The Medicare tax rate is 1.45% for both the employee and employer, with no wage base limit. These payroll taxes apply to every dollar of earned income, including overtime, just as they do to regular wages.

The “One Big Beautiful Bill Act” (OBBBA), signed into law on July 4, 2025, introduces a federal income tax deduction for “qualified overtime compensation.” Effective for tax years 2025 through 2028, this provision allows individuals to deduct up to $12,500 ($25,000 for married couples filing jointly) of qualified overtime pay. This deduction applies to the premium portion of overtime pay required under the federal Fair Labor Standards Act (FLSA), not the entire overtime earnings, and does not impact Social Security or Medicare taxes.

Why Withholding on Overtime May Differ

While the actual tax rate on overtime pay is not inherently higher, the amount of tax withheld from an overtime paycheck can sometimes appear larger, leading to the common misconception. This difference stems from employer methods for calculating federal income tax withholding on supplemental wages, including overtime. The Internal Revenue Service (IRS) provides guidance for employers on how to withhold taxes from these types of payments.

One common method is the percentage method (flat rate method) for supplemental wages up to $1 million annually. Employers can withhold federal income tax at a flat 22% on supplemental wages identified separately from regular wages. This flat percentage can sometimes be higher than an employee’s typical marginal tax rate, especially if their regular earnings place them in a lower tax bracket. For supplemental wages exceeding $1 million, the withholding rate increases to the highest income tax rate, currently 37%.

Another method, the aggregate method, combines supplemental wages with regular wages for a pay period, calculating withholding as if the total were a single payment. The employer then uses the employee’s Form W-4 and IRS withholding tables to determine the appropriate tax. While this method often results in more accurate withholding, it can still lead to a larger amount being withheld from an overtime paycheck because the increased gross pay for that period suggests a higher annual income to the payroll system. Withholding is merely an estimate of annual tax liability, not the final tax owed.

Overtime’s Impact on Your Overall Tax Liability

Earning overtime increases total annual income, impacting overall tax liability at year-end. While overtime is not taxed at a higher rate, increased Adjusted Gross Income (AGI) can push a taxpayer into a higher overall tax bracket. This means that while the first dollars of income are still taxed at lower rates, subsequent dollars, including overtime, might fall into a higher marginal bracket, increasing the overall tax burden.

A higher AGI from substantial overtime can affect eligibility for tax credits and deductions. Many tax benefits are subject to income phase-outs, diminishing or disappearing once income reaches specific thresholds. For instance, some education credits or the Earned Income Tax Credit might be reduced or eliminated for higher-income earners. While overtime increases gross pay, it can also subtly alter the net financial benefit by impacting other parts of the tax return.

Individuals who regularly work significant overtime should review their Form W-4 with their employer. This form dictates how much federal income tax is withheld from each paycheck throughout the year. Adjusting W-4 allowances or requesting additional withholding helps ensure enough tax is withheld, potentially preventing an unexpected tax bill. Proactive W-4 management helps align withholding with actual tax liability, providing a more accurate picture of take-home pay throughout the year.