How Much Do You Get Taxed on Overtime?

Overtime pay represents extra earnings for additional hours worked. Understanding its tax implications is important for managing personal finances and avoiding surprises.

Overtime pay refers to compensation an employee receives for working beyond their standard workweek, typically 40 hours. This additional pay, along with all other forms of earned income, is subject to taxation. Despite a common misconception, overtime is not taxed at a different or higher rate; all earned income contributes to an individual’s total taxable income.

How Overtime Income is Taxed

Overtime pay is considered supplemental wages by the Internal Revenue Service (IRS). This classification primarily influences how taxes are withheld from your paycheck, rather than affecting the final tax rate applied to that income at the end of the tax year.

When you earn overtime, that income is added to your gross income for the tax year. Your overall tax liability is determined by your total annual income, which includes both your regular wages and any supplemental wages like overtime. The U.S. federal income tax system operates on a progressive structure, meaning different portions of your income are taxed at increasing rates, known as tax brackets.

If your regular income places you in a particular tax bracket, earning overtime might push some of your total income into a higher bracket. However, only the portion of income that crosses into the next bracket is taxed at that higher rate. Income already within lower brackets remains taxed at those respective lower rates. While overtime can increase your overall tax liability by elevating your total income, the overtime itself is not singled out for a punitive or additional tax rate.

Understanding Income Tax Withholding

A common misunderstanding about overtime pay stems from the amount of tax withheld from larger paychecks. Withholding is an employer’s estimate of your tax liability for the year, which is then remitted to the taxing authorities. It is not the final tax you owe; rather, it is a prepayment.

Employers use one of two methods to calculate federal income tax withholding on supplemental wages, which include overtime. The percentage method applies when supplemental wages are identified separately from regular wages. Under this method, employers withhold a flat 22% on supplemental wages up to $1 million for the 2024 tax year. This flat rate can appear higher than the percentage withheld from regular pay, leading individuals to believe their overtime is taxed more heavily.

The second approach is the aggregate method, where an employer combines your supplemental wages with your regular wages for the pay period. The total is treated as a single payment, and withholding is calculated as if it were a regular wage payment. This method can also result in a larger amount withheld from an overtime paycheck because the combined higher gross income for that period suggests a higher annual income, prompting more tax to be withheld. Regardless of the method used, any over-withholding is reconciled when you file your annual tax return, potentially resulting in a tax refund.

Other Factors Affecting Your Tax Burden

Beyond your gross income and the amount withheld, several other factors influence your overall tax burden at the end of the year. Tax deductions reduce your taxable income, meaning you pay tax on a smaller portion of your earnings. You can choose between the standard deduction or itemizing deductions. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for those married filing jointly. Common deductions include contributions to traditional Individual Retirement Arrangements (IRAs) or Health Savings Accounts (HSAs), and student loan interest payments.

Tax credits directly reduce the amount of tax you owe, dollar for dollar. Unlike deductions, which lower your taxable income, credits directly reduce your tax bill. Examples of common tax credits include the Child Tax Credit, the Earned Income Tax Credit, and various education credits.

Your filing status also plays a significant role in determining your tax liability. Options like Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Surviving Spouse each have different standard deduction amounts and tax bracket thresholds. Pre-tax deductions, such as contributions to employer-sponsored retirement plans (401(k), 403(b)) or health insurance premiums paid through your employer, reduce your taxable income before taxes are calculated. These factors collectively determine your final tax obligation.

What to Review on Your Paystub and Tax Forms

To understand how your overtime pay is reflected and taxed, regularly review your financial documents. Your paystub is a primary source of information, typically showing separate line items for “regular pay” and “overtime pay.” It also indicates the amount of “federal income tax withheld” for that pay period, which represents the estimated tax taken out, not your final tax liability.

At the end of the year, your employer will provide you with Form W-2, Wage and Tax Statement. Box 1 of your W-2 reports your total gross income for the year, which combines all your regular wages, overtime pay, and any other taxable compensation. This form also details the total amount of federal income tax, Social Security tax, and Medicare tax withheld from your pay throughout the year.

The information from your W-2 is crucial when preparing your annual tax return, typically on Form 1040, U.S. Individual Income Tax Return. On this form, you report your total income and total withholding. The tax return calculation determines your actual tax liability for the year, taking into account all applicable deductions and credits. This final calculation reveals whether you overpaid your taxes and are due a refund, or if you owe additional tax.