How Many Hours of Overtime Is Too Much for Taxes?

Working additional hours for overtime pay can significantly boost income, but it often raises questions about tax implications. Many taxpayers mistakenly believe earning more through overtime could lead to a net financial disadvantage after taxes. This article clarifies the impact of overtime earnings on your tax liability, addressing the worry that extra work might not be financially beneficial.

How Overtime Income is Taxed

Overtime pay is treated as regular taxable income, subject to federal income tax, state income (where applicable), and payroll taxes (FICA). There is no unique “overtime tax” rate; these earnings are added to your total gross income, and taxes are calculated on the combined amount.

The United States operates under a progressive tax system, taxing different portions of income at varying rates. This applies to all earned income, including overtime. While overtime increases your total annual income, it does not mean all your income will suddenly be taxed at a higher rate. The progressive structure ensures only specific income thresholds are subject to higher marginal rates.

A new temporary tax deduction for qualifying overtime pay has been introduced under the One Big Beautiful Bill Act (OBBBA), effective from January 1, 2025, through December 31, 2028. This provision allows eligible W-2 employees to deduct a designated amount of qualifying overtime pay from their federal taxable income. Specifically, the deduction applies to the “half” portion of “time-and-a-half” compensation, meaning the premium wages for hours worked over 40 in a workweek. The maximum annual deduction is $12,500 for most filers and $25,000 for those married filing jointly, with phase-outs for higher earners. This deduction only applies to federal income tax; Social Security and Medicare taxes (FICA) still apply to the entire overtime amount.

Understanding Your Tax Bracket

A common concern with overtime is the belief it could push you into a higher tax bracket, leading to less net income. This stems from a misunderstanding of how the progressive tax system functions. In a progressive system, income is divided into “brackets,” each taxed at a different marginal rate. Only the portion of your income within a particular bracket is taxed at that bracket’s rate.

This distinction highlights the difference between your marginal tax rate and your effective tax rate. Your marginal tax rate is the rate applied to your last dollar of income earned, representing the highest tax bracket your income reaches. Your effective tax rate, conversely, is the overall average rate of tax you pay on all your taxable income. Because different portions of your income are taxed at lower rates before reaching your highest marginal bracket, your effective tax rate is almost always lower than your marginal tax rate.

For example, if a single filer’s income without overtime places them in the 12% tax bracket, and then overtime earnings push a portion of their income into the 22% bracket, only the amount exceeding the 12% bracket’s upper limit is taxed at 22%. The income within the lower brackets remains taxed at their respective lower rates. While some of your overtime pay might be taxed at a higher marginal rate, your overall tax burden on your entire income will increase proportionally, not drastically. Earning more through overtime will consistently result in a higher net income; you will always take home more money than if you had not worked the overtime hours.

Overtime Withholding on Your Paycheck

While overtime pay is not taxed at a different rate than regular wages, the amount of tax withheld from it can appear disproportionately high. This is primarily due to how employers handle withholding for “supplemental wages,” which include overtime pay, bonuses, and commissions.

Employers typically use one of two methods for withholding federal income tax on supplemental wages: the percentage method or the aggregate method. Under the percentage method, employers often withhold federal income tax at a flat rate of 22%. The aggregate method involves combining the supplemental wages with the employee’s regular wages for that pay period and then calculating withholding as if the entire amount were a single payment, based on the employee’s Form W-4.

This higher per-paycheck withholding is an estimate of your annual tax liability, not the final tax you owe. The actual tax owed is determined when you file your annual tax return, taking into account all your income, deductions, and credits. If too much tax has been withheld throughout the year, you will receive a tax refund. Employees who consistently work significant overtime and find their withholding is too high may consider adjusting their Form W-4 with their employer. This form allows you to provide information that helps your employer calculate the correct amount of tax to withhold from your pay, potentially reducing over-withholding.

Other Tax Considerations for Higher Income

While the primary impact of overtime is on your direct income tax calculation, earning a significantly higher income can have additional tax considerations. Eligibility for certain tax credits, such as the Earned Income Tax Credit (EITC), can be affected, with benefits phasing out as income rises above specific thresholds. Similarly, the deductibility of certain expenses or contributions may be limited by income levels. The new temporary deduction for overtime pay, introduced under the One Big Beautiful Bill Act (OBBBA) for tax years 2025 through 2028, also phases out for higher earners. Specifically, the full deduction of up to $12,500 ($25,000 for joint filers) starts to phase out for single filers with modified adjusted gross income over $150,000 ($300,000 for joint filers). These scenarios highlight how increased income can interact with various parts of the tax code.