How Much Tax Is Deducted From Overtime Pay?

Overtime pay, earned when an individual works beyond standard hours, is subject to taxes like regular income. While the increased hourly rate can boost gross earnings, understanding how these additional wages are taxed is important for financial planning. This article explains the taxes applied to overtime pay and employer withholding methods, addressing why deductions might appear larger.

Taxes on Overtime Pay

Overtime pay is taxable income, subject to the same taxes as regular wages. These include federal income tax, Federal Insurance Contributions Act (FICA) taxes, and, in most locations, state and local income taxes. There is no separate “overtime tax rate”; earnings are added to an individual’s total income for tax calculation.

Federal income tax is levied based on a progressive system, meaning higher income levels are subject to higher marginal rates. When overtime earnings increase total annual income, a portion may fall into a higher tax bracket, though only income within that bracket is taxed at the increased rate.

FICA taxes, which fund Social Security and Medicare, are mandatory payroll contributions. For 2025, the Social Security tax rate is 6.2% for employees on earnings up to a wage base limit of $176,100, while the Medicare tax rate is 1.45% on all earned income without a wage limit. Some high-income earners may also face an additional 0.9% Medicare tax on wages exceeding certain thresholds.

Most states and some local jurisdictions impose income taxes, and overtime pay is subject to these taxes. Rates and structures vary significantly, with some states using a flat tax and others a progressive system. The total tax burden on overtime pay can differ based on an individual’s total earnings and location.

How Overtime Withholding Works

Employers deduct estimated taxes from an employee’s pay, including overtime, through withholding. This is an estimate of annual tax liability, not the final amount owed.

Overtime pay is categorized by the IRS as ‘supplemental wages,’ which includes bonuses, commissions, and severance. The IRS provides employers with methods for calculating the tax to withhold from these wages.

One common withholding method is the aggregate method, where the employer combines overtime pay with regular wages for the pay period. Total withholding is then calculated as if it were all regular pay, based on the employee’s Form W-4 and applicable tax tables. This can result in higher withholding for that specific pay period because combined income might push earnings into higher estimated tax brackets.

Alternatively, for supplemental wages under $1 million, employers may use the percentage method, which applies a flat 22% federal income tax withholding rate. If supplemental wages exceed $1 million in a calendar year, the excess is subject to a mandatory flat 37% withholding rate.

Employers use various methods for withholding, which can influence the amount deducted from each paycheck. Regardless of the method, FICA taxes (Social Security and Medicare) are always withheld on overtime pay at their standard rates, as these are mandatory payroll contributions. Withholding ensures employees pay taxes throughout the year, helping prevent a large tax bill at year-end.

Why Overtime Withholding May Seem Higher

Many individuals notice that a larger percentage of their overtime pay seems to be withheld compared to their regular wages. This perception often stems from the interaction of the progressive tax system with how payroll systems estimate annual income based on individual pay periods.

When a significant overtime payment is added to a single pay period, an employer’s payroll system may annualize this higher income, projecting a much larger annual salary than what might actually be earned over the entire year. This annualization can place more of that pay period’s earnings into higher estimated tax brackets, leading to a larger amount being withheld from that particular paycheck.

This higher withholding in a specific pay period does not mean that the actual annual tax rate on overtime is inherently higher; rather, it reflects a temporary over-withholding. If an individual consistently works overtime, the annualized projection may become more accurate, but for intermittent overtime, it can lead to a perceived disproportionate deduction.

The information provided on an employee’s Form W-4 also influences these calculations, as it guides the employer on how much federal income tax to withhold based on filing status and other adjustments. Ultimately, any over-withholding during the year typically results in a larger tax refund or a smaller amount owed when filing the annual tax return.

Managing Your Overtime Withholding

Individuals who regularly earn significant overtime can manage their tax withholding to better align with their actual annual tax liability. The primary tool for employees to influence federal income tax withheld from paychecks is Form W-4, the Employee’s Withholding Certificate. This form allows individuals to inform their employer of their tax situation, including filing status, dependents, and any additional income or deductions.

Reviewing and updating the Form W-4 is particularly important if an individual’s income patterns change due to consistent overtime. The IRS offers a Tax Withholding Estimator, an online tool that helps individuals determine the appropriate tax to withhold by inputting income, deductions, and other relevant financial information. Using this estimator can provide a more accurate projection of annual tax liability and suggest W-4 adjustments.

Employees can also request additional withholding on their W-4 if they prefer more tax taken out of each paycheck. This can help avoid an underpayment penalty or reduce tax owed at year-end. For complex financial situations or significant fluctuations in income, consulting with a tax professional can provide personalized guidance on optimizing withholding.