How Much Is Overtime Taxed Under the New Law?

Overtime pay, earned when employees work beyond standard hours, represents additional earnings subject to taxation. While overtime can significantly boost gross income, understanding its taxation is important for financial planning. Overtime taxation involves federal, and potentially state and local, income taxes, as well as payroll taxes. This article clarifies the tax implications of earning overtime, from how it’s treated as regular income to withholding intricacies and factors influencing your final tax liability.

Overtime as Regular Income

Overtime pay is considered part of an individual’s regular wages for tax purposes. It is not subject to a separate or higher tax rate than other earned income. The Internal Revenue Service (IRS) and state tax authorities treat all wages, including overtime, as gross income. This means overtime pay is simply added to an individual’s total annual income.

A common misunderstanding is that overtime is taxed at a punitive, higher rate. This perception often arises from increased tax withheld from larger overtime paychecks. However, the actual tax rate applied to overtime earnings is the same marginal tax rate that applies to any other income within that same tax bracket. For example, if an individual’s regular income places them in a 22% federal tax bracket, any additional income, including overtime, will also be taxed at 22% until their total income crosses into a higher bracket.

The U.S. tax system is progressive, meaning different portions of an individual’s total income are taxed at increasing rates. Overtime earnings contribute to this total income, potentially pushing an individual into a higher marginal tax bracket for a portion of their earnings. If regular wages fill lower tax brackets, overtime earnings may then fall into a higher marginal tax bracket. This is a consequence of the progressive tax structure applied to all income, not a special tax on overtime itself.

Understanding Overtime Withholding

While overtime is taxed at the same rate as regular income, the amount of tax withheld from an overtime paycheck can appear disproportionately high. This difference between withholding and actual tax liability is a key source of confusion for many individuals. Employers are responsible for withholding income taxes from employee wages, including overtime, throughout the year.

For federal income tax, employers use specific methods to calculate withholding for supplemental wages, which often include overtime. The IRS provides guidance on these methods, primarily the percentage method and the aggregate method. The percentage method calculates withholding based on cumulative wages and an employee’s Form W-4 elections. The aggregate method combines the supplemental payment with regular wages for the most recent payroll period, then calculates withholding as if the total were a single payment. This can result in a higher percentage of the supplemental payment being withheld.

For example, if an employee usually earns $1,000 weekly and receives an additional $500 in overtime, the employer might calculate withholding on $1,500 for that week using the aggregate method. This calculation assumes the employee earns $1,500 every week, leading to a larger upfront withholding amount. This higher withholding is an estimation designed to prevent underpayment of taxes over the course of the year, not an indication of a higher underlying tax rate on overtime. Actual tax liability is determined when an individual files their annual tax return, considering all income, deductions, and credits.

Overtime earnings are also subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. For 2025, the Social Security tax rate is 6.2% for both employees and employers, applied to wages up to an annual wage base limit of $176,100. The Medicare tax rate is 1.45% for both employees and employers, with no wage base limit. An additional Medicare tax of 0.9% applies to individual earnings over $200,000, or $250,000 for married couples filing jointly, with only the employee portion withheld. These FICA taxes are withheld from all earned income, including overtime, contributing to total deductions on an overtime paycheck.

Factors Influencing Your Overtime Tax Amount

While withholding estimates taxes throughout the year, an individual’s actual tax liability on overtime is influenced by several personal financial factors. Total taxable income for the year, including all wages, salaries, and overtime, directly determines an individual’s federal income tax bracket. For 2025, federal income tax rates range from 10% to 37%. Earning overtime can push a taxpayer’s total income into a higher marginal tax bracket, meaning the portion of income within that higher bracket, including some overtime earnings, will be taxed at the higher rate.

Pre-tax deductions also reduce the amount of income subject to tax, affecting the final tax on overtime. Contributions to retirement plans like a 401(k), health insurance premiums, and flexible spending accounts are examples. These amounts are subtracted from an employee’s gross pay before taxes are calculated, lowering taxable income. Reduced taxable income can result in a lower overall tax liability, indirectly lessening the tax impact of overtime earnings.

Tax credits provide a direct, dollar-for-dollar reduction in the amount of tax owed, unlike deductions which reduce taxable income. Credits can significantly lower an individual’s final tax bill, making the net effect of earning overtime more favorable. Some credits are nonrefundable, reducing tax liability only to zero, while others are refundable and can result in a refund even if no tax is owed. The availability and amount of these credits depend on various eligibility criteria.

Effective tax planning, such as adjusting a Form W-4 with an employer or making estimated tax payments, can help align withholding with actual tax liability. A Form W-4 allows employees to indicate their filing status, deductions, and credits, helping employers withhold the correct amount of federal income tax. An individual anticipating significant overtime earnings might consider reviewing their W-4 to avoid over- or under-withholding.

State and Local Overtime Taxation

Beyond federal taxes, overtime earnings are also subject to state and, in some jurisdictions, local income taxes. The tax treatment of overtime at these levels generally mirrors federal principles, meaning overtime is considered part of regular income and added to an individual’s total income for state and local tax calculations. Specific tax laws vary significantly across different states and localities.

State income tax structures differ widely across the United States. Some states impose a flat income tax rate, where all taxable income is taxed at a single percentage. Other states utilize a progressive tax system, similar to the federal system, with different income brackets taxed at increasing rates. There are also states that do not levy any statewide income tax.

Local income taxes, which can be imposed by cities, counties, or school districts, further complicate the tax landscape for overtime. These local taxes fund local government services and programs. Like state taxes, local income tax rates and structures vary, with some localities imposing a flat rate, others a progressive rate, or even a fixed dollar amount per paycheck. Individuals must understand the specific state and local tax rules that apply to their earnings, as these can significantly impact the net amount received from overtime work.