Does Overtime Get Taxed More Than Regular Pay?

When employees work beyond their standard hours, they often receive “overtime” pay, typically compensated at a higher rate. A common misunderstanding exists regarding whether these additional earnings face a higher tax burden compared to regular wages. The perception often arises from the amount withheld from an overtime-heavy paycheck. This article will clarify how overtime wages are taxed and why the withholding might appear higher.

How Overtime Wages Are Taxed

Overtime wages are not taxed at a higher rate than your regular wages for federal income tax purposes. Instead, they are simply added to your total gross income for the year. The federal income tax system uses marginal tax brackets, meaning different portions of your income are taxed at increasing rates. Your total annual income, regardless of whether it comes from regular hours or overtime, determines which tax brackets apply to your overall earnings.

For example, if your annual income places you in the 22% federal income tax bracket, both regular and overtime earnings within that bracket are subject to the same 22% rate. State income tax rules vary, but most jurisdictions also treat overtime as part of your total taxable income, applying their standard income tax rates.

Beyond income taxes, overtime wages are also subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. For 2024, the Social Security tax rate is 6.2% on earnings up to $168,600, while the Medicare tax rate is 1.45% on all earned wages without limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 for single filers or $250,000 for married couples filing jointly. These FICA taxes apply equally to both regular and overtime pay, up to the Social Security wage base limit.

Understanding Overtime Withholding

The reason many individuals believe overtime is taxed more heavily stems from the difference between tax liability and tax withholding. Your tax liability is the actual amount of tax you owe to the government based on your total annual income, calculated when you file your tax return. Tax withholding, on the other hand, is an estimate of your tax liability that your employer deducts from each paycheck and sends to the government throughout the year.

Employers use various methods to calculate withholding for supplemental wages, which include overtime pay. One common approach is the aggregate method, where the employer combines the overtime pay with your regular wages for that pay period and calculates withholding as if the total were a single payment for a regular pay period. This method can lead to a higher percentage of that specific paycheck being withheld because the combined higher income for that single pay period might push a larger portion of your earnings into a higher withholding bracket, even if your overall annual tax rate remains unchanged.

Another method employers might use for supplemental wages is the percentage method, which involves withholding a flat rate. For 2024, the federal flat rate for supplemental wages is 22%. These withholding methods are designed to ensure that enough tax is collected throughout the year, but they can sometimes result in more tax being withheld from a particular paycheck than what your true annual tax liability will be.

Reviewing Your Pay Stub

Understanding your pay stub is an effective way to demystify how overtime impacts your take-home pay. Locate the “gross pay” section, which represents your total earnings before any deductions.

Within gross pay, you should find separate line items for regular wages and overtime earnings, allowing you to see the distinct amounts. Below your gross pay, you will see a list of deductions. These include pre-tax deductions, which reduce your taxable income.

Further down, you will find itemized tax withholdings. Look for federal income tax (often labeled “FIT” or “Federal Withholding”), state income tax (if applicable), Social Security, and Medicare. Observing these individual deductions helps you see exactly how much was withheld for each tax type from your regular and overtime earnings combined. This detailed view confirms that overtime is not subjected to a separate, higher tax rate but rather contributes to your overall gross income from which all applicable taxes are withheld.