How Much Is Overtime Taxed With the New Deduction?

Overtime pay often brings a mix of excitement and confusion for many workers. While the prospect of earning more income is appealing, the amount that actually appears in a paycheck after taxes can be surprisingly lower than anticipated. Understanding the various deductions applied to overtime wages, from federal income tax withholding to other mandatory contributions, is essential for accurately interpreting your pay and managing your personal finances.

How Overtime Is Taxed for Federal Income Purposes

Overtime earnings are not subject to a unique or separate tax rate; they are considered regular income by the Internal Revenue Service (IRS) and are fully taxable for federal income purposes. Overtime pay is combined with your standard wages and other taxable income to determine your overall federal income tax liability. The United States employs a progressive tax system, meaning different portions of an individual’s income are taxed at increasing rates across multiple tax brackets.

Earning overtime can, in some cases, push a taxpayer’s total income for a specific pay period into a higher tax bracket. However, this does not mean all of your income will be taxed at that higher marginal rate. Only the portion of your income that falls within the higher bracket is subject to the increased rate, while income in lower brackets continues to be taxed at their respective, lower rates. The actual federal income tax owed on overtime, alongside all other earnings, is ultimately calculated when you file your annual tax return, taking into account your total income, deductions, and credits for the entire year. This final calculation determines your true tax liability, which may differ from the amounts withheld from each paycheck throughout the year.

Understanding Overtime Withholding

A common misconception is that overtime is taxed at a higher rate. This perception often stems from how federal income tax is withheld from supplemental wages like overtime. Employers are legally required to withhold income from all wages, and the method used can significantly impact the amount deducted, making it appear as though the pay is taxed more heavily.

One primary method employers use is the aggregate method. Here, supplemental wages are combined with regular wages for the current pay period, and tax withholding is calculated as if the combined amount were a single, larger paycheck. This approach can result in a higher percentage of the combined income being withheld for that specific pay period, as a larger portion of the income may temporarily fall into higher withholding brackets. For example, if overtime pushes a bi-weekly pay significantly higher, the withholding calculation might apply a higher percentage to the additional income for that payroll cycle.

Alternatively, employers may use the percentage or flat rate method for supplemental wages. This method generally applies a flat 22% withholding rate, provided total supplemental wages do not exceed $1 million in a calendar year. Amounts exceeding $1 million are subject to a mandatory flat withholding rate of 37%. Regardless of the method, withholding is an estimate of your annual tax liability. If too much tax is withheld, you will receive a refund; if too little, you may owe additional tax.

Other Taxes and Deductions on Overtime

Beyond federal income tax, overtime pay is also subject to other mandatory payroll taxes and various deductions. Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, apply to overtime wages just as they do to regular earnings. For 2025, the Social Security tax rate is 6.2% for employees, applied to wages up to an annual wage base limit of $176,100. The Medicare tax rate is 1.45% for employees, with no wage base limit. Additionally, a 0.9% Additional Medicare Tax applies to wages exceeding $200,000 for individual filers, or $250,000 for married couples filing jointly; employers must begin withholding this tax once an employee’s wages surpass the $200,000 threshold.

Many states and some local jurisdictions also impose income taxes on all wages, including overtime, with rates and rules varying significantly by location. These state and local taxes are typically withheld from paychecks in addition to federal taxes.

Contributions to pre-tax accounts, such as 401(k) plans, traditional Individual Retirement Accounts (IRAs), or Health Savings Accounts (HSAs), also reduce taxable income, including overtime, before federal income tax is calculated. These deductions typically lower the amount of income subject to federal and state income taxes, and often FICA taxes as well, thereby increasing the employee’s net pay.

Other deductions, categorized as post-tax, reduce an employee’s net pay but do not affect their taxable income. Examples include Roth 401(k) contributions, which are made with after-tax dollars, or voluntary deductions like union dues or wage garnishments. These deductions are taken from pay after all applicable taxes have been calculated and withheld.

Interpreting Your Overtime Paycheck

Understanding the various components of your pay stub is crucial for deciphering the true impact of overtime earnings. Begin by locating your gross overtime pay. Next, identify the federal income tax withholding, FICA tax deductions for Social Security and Medicare, and any state or local income tax deductions. Comparing a pay stub that includes overtime to one without can provide clear insights into how each of these categories proportionally increases with higher earnings.

Pay close attention to any pre-tax deductions, such as contributions to retirement accounts or health insurance premiums, which reduce your taxable income and thus your tax liability. These pre-tax deductions are typically factored in before federal income tax is calculated, but generally after FICA taxes. For consistent discrepancies where you owe significant tax at year-end or receive a very large refund, consider reviewing your W-4 elections with your employer. Adjusting your W-4 can help align your withholding more closely with your actual tax liability, minimizing surprises when you file your annual tax return.