How Is Overtime Pay Taxed on Your Paycheck?

Overtime pay, earned for hours worked beyond a standard workweek (typically 40 hours), is compensated at a higher rate, often 1.5 times the regular hourly pay. This additional income is taxable and is subject to the same types of taxes as regular wages. However, the methods used for federal income tax withholding can sometimes create the impression that overtime is taxed at a higher rate. This article will explain how all types of taxes apply to overtime earnings, clarifying withholding nuances and actual tax liability.

Federal Income Tax Withholding on Overtime

Federal income tax applies to overtime earnings, which the Internal Revenue Service (IRS) categorizes as “supplemental wages.” These include various forms of pay beyond regular salary, such as bonuses, commissions, and overtime. While ultimately subject to an individual’s marginal tax rate at filing, employers use specific methods for withholding federal income tax throughout the year.

Employers choose between two primary withholding methods for supplemental wages. The first is the percentage (flat rate) method. For supplemental wages up to $1 million annually, employers can withhold federal income tax at a flat rate of 22%. It is important to understand that this 22% is a withholding rate, not the actual tax rate; an individual’s final tax liability is determined when they file their annual tax return.

The second is the aggregate method, where employers combine supplemental wages with regular wages for a pay period. Withholding is then calculated based on the employee’s W-4 form and standard tables, treating the combined amount as regular pay. Regardless of the method, the perception of higher overtime taxation often arises because withholding might be higher than expected. This higher withholding helps prevent underpayment, and any over-withholding is reconciled when the taxpayer files their annual income tax return, potentially resulting in a refund.

Other Federal Payroll Taxes on Overtime

Beyond federal income tax, overtime pay is also subject to other mandatory federal payroll taxes, specifically Social Security and Medicare taxes, collectively known as FICA taxes. These taxes fund social insurance programs and are withheld directly from an employee’s gross wages, including overtime.

Social Security tax (OASDI) applies to overtime wages up to an annual wage base limit. For 2025, this limit is $176,100. The employee contribution rate is 6.2% of wages up to this limit. Once an employee’s cumulative earnings exceed this wage base, no further Social Security tax is withheld for the year.

Medicare tax (HI) applies to all overtime wages without a wage base limit. The employee contribution rate is 1.45% of all covered earnings. An Additional Medicare Tax of 0.9% applies to wages exceeding $200,000 for single filers and $250,000 for married couples filing jointly. This additional tax is solely the employee’s responsibility, with no employer match.

State and Local Income Taxes on Overtime

The taxation of overtime at the state and local levels depends entirely on the specific tax laws of the employee’s resident state and any localities where they work or reside. Most states that levy an income tax treat overtime wages similarly to regular wages for state income tax purposes. Some states impose a flat income tax rate, taxing all taxable income, including overtime, at the same percentage. Other states use a progressive tax rate system, taxing higher income levels at higher percentages.

It is worth noting that a number of states do not impose a state income tax, meaning no state income tax is withheld from regular or overtime earnings. As of 2025, nine states, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, do not have a state income tax. Beyond state taxes, some cities or local jurisdictions may also impose their own income taxes that apply to all wages, including overtime. Withholding rules for state and local taxes on supplemental wages can vary, but generally align with the state’s standard income tax regulations.

Interpreting Your Paystub

Understanding your paystub is essential for discerning how overtime earnings contribute to your tax deductions. Paystubs typically itemize earnings and deductions, though specific abbreviations vary between employers. Gross pay, representing earnings before any deductions, is usually clearly identified, often broken down into regular and overtime pay components.

Common abbreviations for federal taxes include “FIT” or “FWT” for Federal Income Tax, “SS” or “OASDI” for Social Security, and “Med” or “HI” for Medicare. State income tax may appear as “SIT” or “SWT,” while local taxes might be indicated as “Local Tax.” Tax deductions are generally calculated on total gross pay, encompassing both regular and overtime earnings.

This unified calculation explains why some employees perceive their overtime earnings are taxed more heavily. Instead of separate deductions solely for overtime, the total withholding for each tax type reflects the inclusion of those additional earnings, directly accounting for the higher gross pay that includes overtime. Reviewing year-to-date (YTD) totals on your paystub provides a cumulative overview of earnings and withholdings, helping track your financial situation.