How Much Tax Is Taken Out for Overtime Pay?

Overtime pay often raises questions about its tax treatment. Many assume it’s taxed at a higher rate than regular earnings, but this perception stems from how taxes are withheld, not the actual tax rates. Overtime is simply additional income. This article clarifies how overtime pay is taxed and explains why the amount withheld might appear larger.

Overtime as Taxable Income

Overtime pay is considered “wages” by tax authorities and is subject to the same tax rules as regular earnings. It is not taxed at a different statutory rate than standard pay. Instead, overtime earnings are added to an individual’s total taxable income for the year.

While the statutory tax rate on overtime isn’t higher, earning more can increase an individual’s total annual income. This increased income could potentially place a portion of it into a higher federal income tax bracket. The progressive tax system ensures that only the income falling within a higher bracket is taxed at the higher marginal rate, not the entire income.

Taxes on Overtime Pay

Various taxes apply to overtime earnings, just as they do to regular wages. Federal income tax is a primary component, operating under a progressive system where different portions of income are taxed at increasing marginal rates. For 2025, federal income tax rates range from 10% to 37%, with specific income thresholds. The more an individual earns, the higher the marginal tax rate applied to additional income.

Overtime pay is 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 employees, applied to earnings up to an annual wage base limit of $176,100. The Medicare tax rate is 1.45% for employees and applies to all earned income, including overtime. High-income earners may also face an Additional Medicare Tax of 0.9% on wages exceeding specific thresholds, such as $200,000 for single filers or $250,000 for married filing jointly.

Many states impose income taxes, and overtime pay is subject to these taxes just like regular wages. State income tax rates and structures vary significantly, with some states having no income tax, some applying a flat rate, and others using a graduated system. Some cities or local jurisdictions may also levy their own income taxes, which apply to overtime earnings. These local taxes contribute to the total tax burden.

Overtime Withholding Explained

The perception that overtime is taxed “more” often arises from the difference between tax withholding and actual tax liability. Withholding is an employer’s estimate of taxes an employee owes, deducted from each paycheck. Actual tax liability is determined when an individual files their annual tax return, taking into account all income, deductions, and credits.

Overtime pay is frequently classified as “supplemental wages” by employers for withholding purposes, as detailed in IRS Publication 15. Employers commonly use one of two methods to calculate federal income tax withholding on supplemental wages. The percentage method applies a flat rate, such as 22% for federal income tax, to supplemental wages up to $1 million. This flat rate can seem high if an individual’s typical marginal tax rate is lower, leading to apparent over-withholding.

The second method is the aggregate method, where supplemental wages are combined with regular wages for a pay period. Withholding is calculated as if the total were a single, larger payment. This method annualizes the inflated pay period income, which can push the calculated withholding into a higher tax bracket, even if the individual’s actual annual income will not reach that bracket. The higher withholding from these methods ensures sufficient taxes are paid throughout the year. These calculations are estimates, designed to prevent a large tax bill at year-end.

Calculating Your Actual Overtime Tax

The final, actual tax on all earned income, including overtime, is determined annually when filing a tax return. All income sources for the year are aggregated to calculate total taxable income. This annual reconciliation ensures the correct amount of tax is paid based on an individual’s complete financial picture.

Several factors influence the final tax amount, including total annual income, which dictates federal and state tax brackets. An individual’s filing status, such as single or married filing jointly, also plays a significant role, affecting standard deduction amounts and tax bracket thresholds. Deductions, like the standard or itemized deductions, reduce the amount of income subject to tax, lowering the overall tax burden. Tax credits, such as the Child Tax Credit or the Earned Income Tax Credit, directly reduce the amount of tax owed.

While overtime might push some income into a higher marginal tax bracket, the effective tax rate considers all these factors. If too much tax was withheld from paychecks, particularly due to higher overtime withholding, the individual will receive a tax refund. If insufficient tax was withheld, a balance will be due to the tax authorities. This annual process clarifies that paycheck withholding is an estimation, and the true tax impact of overtime is reconciled at tax filing time.