How Are Overtime Hours Taxed on Your Paycheck?

Overtime pay represents extra effort and increased earnings. Like regular wages, any additional compensation earned from working beyond standard hours is subject to taxation. Understanding how these extra hours are taxed is important for managing your personal finances.

Overtime as Taxable Income

Overtime pay is fully taxable as part of an individual’s gross income, just like regular wages. Gross pay includes all earnings before deductions, such as hourly wages, salaries, bonuses, and overtime.

A common misunderstanding is that overtime is taxed at a higher rate than regular pay. This perception often arises because the amount withheld from an overtime paycheck might seem disproportionately large. However, the actual tax rate applied to your income at the end of the year is based on your total annual earnings, not on whether a portion of those earnings came from overtime.

The tax system uses progressive tax brackets, where different portions of your income are taxed at increasing rates. Overtime increases your overall income, potentially pushing a larger portion of your earnings into a higher tax bracket. This does not mean overtime is subject to a unique, higher tax rate separate from your other income. Instead, it contributes to your total income, which then determines your overall tax liability.

Federal Income Tax on Overtime

Federal income tax applies to overtime earnings as part of your total gross income. The United States uses a progressive income tax system, where higher income levels are taxed at higher marginal rates. Overtime pay can increase your annual earnings, potentially subjecting a greater portion of your income to a higher marginal tax bracket. Only the income within that higher bracket is taxed at the increased rate, not your entire income.

Employers must withhold federal income tax from your wages, including overtime, to cover your estimated tax liability. For supplemental wages, such as overtime, employers use specific withholding methods. The Internal Revenue Service (IRS) outlines these methods in publications like Publication 15-T.

One common approach is the percentage method, where the employer withholds a flat 22% of the supplemental wage for amounts up to $1 million in a calendar year. Another method is the aggregate method, where supplemental wages are added to regular wages for the most recent payroll period. The total is then treated as a single wage payment, and income tax is calculated on this combined amount. These withholding methods are estimates designed to ensure you meet your tax obligations throughout the year.

The amount withheld from an overtime paycheck might appear high due to these methods, especially if the supplemental wage pushes the pay period’s total income into a higher withholding bracket. This is a withholding estimate, not your final tax rate. Your actual federal income tax liability is calculated when you file your annual tax return, considering all your income, deductions, and credits. If too much was withheld, you will receive a refund; if too little, you may owe additional tax.

State and Local Income Taxes on Overtime

Beyond federal income taxes, overtime earnings are also subject to state and, in some cases, local income taxes. State and local taxation varies significantly across the United States. Some states do not impose an income tax, while others have flat or progressive tax structures.

For states that levy an income tax, the principles for taxing overtime align with the federal approach. An increase in overall income due to overtime can affect the amount of state income tax withheld or ultimately owed.

Certain cities, counties, or other local jurisdictions may also impose their own income taxes on overtime earnings. Because tax laws differ widely, individuals should understand the specific rules that apply to their jurisdiction. Your employer handles the withholding of these taxes based on your work location and residency.

Social Security and Medicare Taxes on Overtime

Overtime pay is also subject to Social Security and Medicare taxes, known as Federal Insurance Contributions Act (FICA) taxes. These taxes fund benefits for retirees, people with disabilities, and medical care for the elderly. Unlike federal income tax, FICA taxes apply at flat percentage rates to all earned income, including overtime, up to certain limits for Social Security.

For the 2024 tax year, the employee’s contribution rate for Social Security is 6.2% of earnings. There is an annual wage base limit for Social Security, meaning earnings above this threshold are not subject to the tax. In 2024, this limit is $168,600. Once an individual’s cumulative earnings for the year reach this amount, no further Social Security tax is withheld, regardless of how much more they earn.

Medicare tax has an employee contribution rate of 1.45% and no wage base limit. All earned income, including every dollar of overtime, is subject to the 1.45% Medicare tax. An extra Medicare tax of 0.9% applies to earnings above certain thresholds: $200,000 for single filers, $250,000 for married individuals filing jointly, and $125,000 for married individuals filing separately.

Employers are responsible for withholding these FICA taxes from each paycheck, including overtime wages. The additional Medicare tax is an employee-only tax, and employers must withhold it once an employee’s wages exceed the specified threshold within a calendar year.