How Much Tax Is Taken From Overtime Pay?

Many workers often question how overtime pay is taxed, with a common misconception that it is subject to a higher or separate tax rate. Overtime wages are indeed taxable, but not in a way that differs fundamentally from regular earnings. This article will explain how various taxes apply to overtime pay and how these amounts are typically handled.

Overtime as Taxable Income

Overtime pay is considered part of an employee’s gross income for tax purposes. It is not taxed at a special, elevated rate. Instead, any earnings from overtime are simply added to an employee’s regular wages, increasing their total taxable income.

Various types of taxes apply to overtime pay just as they do to regular wages. These include federal income tax, Social Security tax, Medicare tax, and potentially state and local income taxes, depending on where an individual lives and works. These taxes are applied to the entire gross income, encompassing both regular and overtime earnings.

Recent legislation, known as the “One Big Beautiful Bill Act,” signed into law on July 4, 2025, introduces a temporary federal income tax deduction for qualified overtime compensation. For tax years 2025 through 2028, eligible workers can deduct up to $12,500 ($25,000 for joint filers) of their overtime pay from their federal taxable income. This deduction applies specifically to the premium portion of overtime (the “half” in “time and a half”) as required by the Fair Labor Standards Act (FLSA) for hours worked beyond 40 in a workweek.

However, this deduction does not mean overtime is tax-free; it reduces the amount of income subject to federal income tax, and the benefit is realized when filing annual tax returns, not typically through immediate changes in paychecks.

Understanding Federal Income Tax Withholding on Overtime

The perception that overtime is taxed at a higher rate often stems from the way federal income tax is withheld from supplemental wages, which include overtime. While the actual tax rate on overtime is the same as regular pay, the withholding methods can lead to a larger percentage being withheld from an overtime-heavy paycheck. This increased withholding helps to ensure that enough tax is collected throughout the year, preventing a large tax bill at year-end.

Employers typically use one of two primary methods for federal income tax withholding on supplemental wages: the percentage method or the aggregate method. The choice of method often depends on how the supplemental wages are paid to the employee. For example, if overtime pay is clearly identified and paid separately from regular wages, or if an employee’s total supplemental wages for the year exceed a certain threshold, the percentage method might be used.

Under the percentage method, a flat rate is applied to the supplemental wages. For supplemental wages up to $1,000,000 in a calendar year, the employer can withhold federal income tax at a flat rate of 22%. If an employee receives more than $1,000,000 in supplemental wages from one employer in a calendar year, the amount exceeding $1,000,000 is subject to a mandatory withholding rate of 37%, which is the highest tax rate applicable to individual income. This 22% or 37% withholding rate can seem high compared to the percentage withheld from regular pay, especially for individuals in lower income tax brackets, contributing to the belief that overtime is taxed at a higher rate.

The aggregate method is often used when supplemental wages, such as overtime, are combined with regular wages in a single paycheck and not separately identified. In this scenario, the employer adds the supplemental wages to the employee’s regular wages for the most recent payroll period. The total of these combined wages is then treated as a single payment for that pay period, and the employer calculates the federal income tax withholding based on the employee’s Form W-4 and the standard IRS withholding tables.

After calculating the total withholding for the combined amount, the employer subtracts any tax already withheld from the regular wages to determine the amount to withhold specifically from the supplemental pay. This method can push the combined income for that specific pay period into a higher withholding bracket. Consequently, a larger amount of tax might be withheld from that particular paycheck, making it appear as though the overtime portion is taxed more heavily. These are simply withholding amounts designed to approximate annual tax liability, and the actual tax owed is calculated when an individual files their annual tax return.

Social Security, Medicare, State, and Local Tax Implications

Overtime pay is also subject to Social Security and Medicare taxes, collectively known as FICA taxes. These taxes are applied to gross wages, including overtime, with specific rates and limits.

Social Security tax, also referred to as Old-Age, Survivors, and Disability Insurance (OASDI), is typically withheld at a rate of 6.2% from an employee’s gross wages. There is an annual wage base limit for Social Security tax, meaning that once an employee’s cumulative gross wages for the year reach this limit, no further Social Security tax is withheld for the remainder of the year. For 2025, this wage base limit is $176,100. After an employee’s earnings exceed this amount, only Medicare tax will continue to be withheld from their pay.

Medicare tax, or Hospital Insurance (HI) tax, is applied to all gross wages, including overtime, without any wage base limit. The employee’s share of Medicare tax is 1.45% of all covered earnings. Additionally, an extra 0.9% Additional Medicare Tax applies to wages exceeding certain thresholds: $200,000 for single filers, and $250,000 for married couples filing jointly. Employers are required to begin withholding this additional tax once an employee’s wages surpass $200,000 in a calendar year, regardless of their filing status.

State and local income tax treatment of overtime pay varies significantly across jurisdictions. Most states and localities consider overtime pay as regular wages for income tax purposes, applying their established tax rates and withholding rules. Some states do not impose a state income tax, while others have flat tax rates or progressive tax structures where higher incomes are taxed at higher rates. Local income taxes may also apply in certain cities or counties, further influencing the total amount withheld from an overtime paycheck.

Reviewing Your Pay Stub

Understanding your pay stub is a practical step to see how overtime pay and its associated taxes are accounted for. A pay stub provides a detailed breakdown of your earnings and deductions for a specific pay period. It typically lists your gross pay, which is your total earnings before any deductions, and may show separate line items for regular hours and overtime hours, along with their respective rates and earnings.

You will find sections detailing various tax withholdings, including Federal Income Tax, Social Security (often listed as OASDI or FICA), Medicare (often listed as HI or FICA), and any applicable State and Local taxes. Each of these deductions will show the amount withheld for the current pay period and often a year-to-date (YTD) total. Comparing the total gross pay to the sum of all deductions helps clarify your net pay, which is the actual amount deposited into your bank account.

If you notice that Social Security withholding has stopped later in the year, you can check your year-to-date gross wages on your pay stub to see if you have reached the annual Social Security wage base limit. This indicates that you have paid the maximum Social Security tax for the year. Regularly reviewing your pay stub helps ensure accuracy and provides insight into how your overtime earnings contribute to your overall compensation and tax withholdings.