How Much Tax Is Taken Out of Overtime Pay?
Gain clarity on how overtime pay is taxed. Understand the difference between withholding and actual tax rates to better manage your earnings.
Overtime pay, earned for hours worked beyond a standard workweek, is a common feature of many employment arrangements. Like regular wages, these additional earnings are subject to various taxes. Understanding how overtime pay is taxed helps employees accurately anticipate their net income. This article explains the taxation of overtime, the withholding process, other factors influencing take-home pay, and common misconceptions.
How Overtime Pay is Taxed
Overtime pay is considered taxable income, subject to the same taxes as an employee’s standard wages. These include federal income tax, state income tax (if applicable), Social Security tax, and Medicare tax. An individual’s total earnings, including overtime, determine their overall tax liability.
Federal income tax rates are progressive, which means different portions of income are taxed at increasing rates. In 2025, there are seven federal income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. An employee’s total annual income, encompassing both regular and overtime pay, is used to determine which tax brackets apply. For example, a single filer’s taxable income up to $11,925 in 2025 is taxed at 10%, while income between $11,926 and $48,475 is taxed at 12%.
Social Security and Medicare taxes, collectively known as FICA taxes, also apply to overtime earnings. For 2025, the Social Security tax rate for employees is 6.2% on wages up to $176,100, while the Medicare tax rate is 1.45% on all wages, with no income limit. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 for an individual.
Understanding Tax Withholding on Overtime
Many individuals perceive that overtime pay is “taxed more heavily” than regular wages. This perception often arises from the withholding process rather than a higher actual tax rate. Employers must withhold income taxes from each paycheck based on an employee’s Form W-4 and estimated annual income. When an employee receives significant overtime, the payroll system might project a higher annual income, leading to more tax withheld from that specific paycheck.
This increased withholding is an estimate designed to help employees meet their tax obligations. A higher amount withheld from an overtime-heavy paycheck does not mean the overtime is subject to a higher tax rate. Instead, it reflects an attempt to account for the potential increase in the employee’s overall annual income and tax liability. Actual tax liability is determined when the individual files their annual tax return, at which point any over-withholding is reconciled, often resulting in a tax refund.
Form W-4 plays a central role in determining federal income tax withholding. Employees provide information on this form, such as filing status and adjustments, which guides the employer’s calculations. While the W-4 influences federal income tax withholding, it does not affect the fixed rates for Social Security and Medicare taxes.
Other Factors Affecting Your Net Overtime Pay
Beyond federal and state income taxes, several other factors can influence the net amount of an employee’s overtime pay. Various deductions are taken from gross wages, categorizing as either pre-tax or post-tax. Pre-tax deductions reduce an employee’s taxable income before taxes are calculated, thereby lowering the amount of federal and often state income tax owed.
Common pre-tax deductions include contributions to traditional 401(k) retirement plans and health insurance premiums. These deductions lower the gross income used for tax calculations, though funds are typically taxed upon withdrawal in retirement. Conversely, post-tax deductions are taken after all required taxes have been withheld. These do not reduce taxable income and include contributions to Roth 401(k) plans, which are taxed upfront but offer tax-free withdrawals in retirement.
Local income taxes can also reduce net pay in many jurisdictions. These taxes, levied by cities, counties, or school districts, vary significantly in their rates and application. Wage garnishments for obligations such as child support or unpaid debts are mandatory deductions that reduce an employee’s net pay, although they do not affect taxable income.
Common Misconceptions About Overtime Taxation
A frequent misconception is that overtime earnings are taxed at a higher rate than regular pay. This is incorrect; overtime pay is added to regular wages, and the total is subject to the same income tax rates and brackets. The progressive tax system means only the portion of income falling into a higher tax bracket is taxed at that increased rate, not the entire income. While overtime can increase overall taxable income and potentially move someone into a higher tax bracket, it does not mean all their earnings are suddenly taxed at the highest marginal rate.
Another misunderstanding is the belief that working overtime causes individuals to “lose money” or is not financially beneficial due to taxation. While more money is withheld from paychecks with overtime, this is due to the withholding estimation process, not a penalty. Increased gross income from overtime will always result in higher net pay, even after taxes and deductions. For tax years 2025 through 2028, a federal income tax deduction of up to $12,500 ($25,000 for joint filers) is allowed for qualified overtime compensation. This deduction reduces federal taxable income but does not eliminate all taxes on overtime, as FICA and state income taxes still apply.