How Is Overtime Pay Taxed in Texas?

Overtime pay is additional compensation for employees working beyond their standard scheduled hours. This extra income is subject to specific federal and, depending on the state, local tax rules.

Federal Income Tax on Overtime

Overtime pay is considered part of an employee’s regular wages by the IRS and is fully subject to federal income tax. It is added to an individual’s total annual income, which determines their marginal tax bracket. The actual tax rate applied to overtime income is the same as regular wages within the same tax bracket.

Federal income tax withholding on overtime pay can appear higher than on regular wages. This occurs because overtime is categorized as “supplemental wages” by the IRS. Supplemental wages include payments beyond regular salary, such as bonuses, commissions, and severance pay.

Employers commonly use specific methods for withholding federal income tax from supplemental wages. One method is to combine supplemental wages with regular wages and calculate withholding on the total amount based on the employee’s Form W-4. Another common method, particularly if supplemental wages are identified separately, is to apply a flat 22% withholding rate for amounts up to $1 million. This flat rate withholding can sometimes lead to a larger percentage of an overtime check being withheld compared to a regular paycheck, even though the actual tax liability, determined at year-end, might not be disproportionately higher.

A new temporary federal income tax deduction for qualified overtime compensation has been introduced for tax years 2025 through 2028. Individuals can deduct up to $12,500, or $25,000 for joint filers, of the “half” portion of time-and-a-half overtime pay. This deduction aims to reduce the federal income tax burden on overtime earnings for those below certain income thresholds. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 for single filers or $300,000 for joint filers.

Other Federal Taxes on Overtime

Beyond federal income tax, overtime pay is also subject to other mandatory federal deductions, specifically Social Security and Medicare taxes, collectively known as FICA taxes. These taxes fund the Social Security program, which provides retirement, disability, and survivor benefits, and the Medicare program, which covers hospital insurance.

For 2025, the Social Security tax rate is 6.2% for both the employee and the employer, applied to wages up to an annual limit of $176,100. The Medicare tax rate is 1.45% for both the employee and the employer, applied to all covered wages without any wage base limit. These FICA taxes are withheld at these fixed rates from overtime pay, just as they are from regular wages. Additionally, an extra 0.9% Additional Medicare Tax applies to an individual’s wages exceeding $200,000 in a calendar year, with the employer responsible for withholding this amount.

Texas State Tax Considerations

Texas is one of a few states that does not impose a state individual income tax. Therefore, overtime pay earned by individuals in Texas is not subject to any state-level income tax deductions. This policy means that while federal taxes apply, Texans do not face an additional income tax burden from their state government on their regular or overtime earnings.

Understanding Overtime Withholding

The way taxes are withheld from overtime pay can sometimes create a perception that it is taxed at a higher rate than regular wages. This withholding is an estimate, and the actual tax liability for the year is determined when an individual files their annual federal income tax return. If too much tax was withheld throughout the year, the employee would receive a refund; conversely, if too little was withheld, they would owe additional tax.