Does Overtime Get Taxed Differently?

Many people wonder if overtime earnings are taxed at a different rate than regular wages. While it might appear that way on a paycheck due to how taxes are initially withheld, the underlying principles of income taxation apply consistently across all earned income. Understanding the distinction between tax withholding and actual tax liability clarifies how overtime pay affects your overall tax situation. This article explains how the tax system treats overtime earnings, addressing common questions.

Understanding How Income Is Taxed

The United States employs a progressive income tax system, where different portions of your income are taxed at different rates. As income increases, higher portions fall into progressively higher tax brackets. All forms of income, including regular wages, overtime pay, and bonuses, are added together to determine your total taxable income for the year. This total annual income is then subject to federal income tax rates based on applicable tax brackets.

Only the income falling within a specific tax bracket is taxed at that bracket’s rate. If your income pushes you into a higher bracket, only the amount exceeding the previous threshold is taxed at the new, higher rate, not your entire income. This graduated approach ensures your total tax burden reflects the progressive system.

How Overtime Pay Is Withheld

Overtime pay is classified by the Internal Revenue Service (IRS) as “supplemental wages.” These are payments made in addition to regular wages, including bonuses or commissions. Employers must withhold federal income tax from these wages, and the method used can make it seem as though overtime is taxed at a higher rate.

Employers generally use two methods for calculating federal income tax withholding on supplemental wages. One is the percentage method, where a flat rate is applied if the payment is identified separately. For most supplemental wages up to $1 million annually, this flat federal income tax withholding rate is 22%. Amounts exceeding $1 million are subject to a mandatory 37% withholding rate.

The aggregate method is used when supplemental wages are combined with regular wages in a single payment. The employer adds the supplemental wages to the regular wages for that pay period. They then calculate income tax withholding as if the total were a single regular wage payment, using the employee’s Form W-4 and standard withholding tables. This can result in a higher amount being withheld from that paycheck, as the larger combined sum might temporarily push the employee into a higher withholding bracket for that pay period.

Other payroll taxes are also withheld from overtime pay. Social Security and Medicare taxes, known as FICA taxes, are withheld at the same rates from overtime earnings as from regular wages. For 2025, the Social Security tax rate is 6.2% on wages up to $176,100, and the Medicare tax rate is 1.45% on all wages. These FICA taxes apply uniformly to all earned income.

Overtime and Your Annual Tax Bill

At the end of the tax year, all your income, including regular pay and overtime, is aggregated to determine your total annual taxable income. The progressive federal income tax rates are then applied to this overall sum. Overtime income is not taxed at a different or inherently higher rate than any other income falling within the same tax bracket. Overtime simply increases your total annual earnings, potentially causing more income to fall into higher tax brackets.

Any over-withholding that occurred throughout the year, especially due to supplemental wage withholding methods, is reconciled when you file your annual tax return. If more tax was withheld than you ultimately owe, the difference is returned as a tax refund. This ensures you only pay the actual tax owed based on your total annual income, deductions, and credits.

Beginning in 2025 and extending through 2028, a temporary deduction for qualified overtime pay is available under the One Big Beautiful Bill Act (OBBBA). This provision allows eligible workers to deduct a portion of their overtime pay from federal taxable income. For most filers, this deduction can be up to $12,500 annually, or $25,000 for those filing jointly, though it phases out for higher earners. This deduction reduces your overall taxable income, potentially lowering your final tax bill or increasing your refund.

Common Misconceptions About Overtime Taxation

One common misconception is that “overtime is taxed at a higher rate” than regular pay. This belief stems from a larger percentage being withheld from an overtime check. However, this higher withholding is a payroll calculation designed to estimate annual tax liability, especially for large, irregular payments. The actual federal income tax rate applied to your overtime income at year-end is the same as for any other income within your tax bracket.

Another concern is that “working overtime pushes me into a higher tax bracket, so I lose money.” While increased income from overtime can move you into a higher tax bracket, only the portion of your income falling within that higher bracket is taxed at the increased rate. Income below that threshold remains taxed at lower rates. Earning more through overtime almost always results in a net increase in take-home pay, even after accounting for the higher marginal tax rate on the additional income.

In summary, while the tax initially withheld from an overtime paycheck might appear high, the actual tax owed on that income is treated no differently than any other earned dollar at the same income level. The U.S. progressive tax system applies to your total annual income, not individual paychecks. Any withholding discrepancies are resolved when you file your annual tax return, ensuring your final tax liability accurately reflects your earnings and deductions.