How Your Overtime Pay Is Actually Taxed

Income earned through employment is subject to taxation. This includes all forms of compensation, such as regular wages, salaries, and any additional earnings from working beyond standard hours. Understanding how these earnings are treated for tax purposes is important for managing personal finances.

Federal Income Tax Withholding on Overtime

Overtime pay is considered regular taxable income for federal income tax purposes. The primary distinction for overtime pay often lies in how federal income tax is withheld from these supplemental wages. Employers typically use one of two methods for withholding federal income tax from supplemental wages like overtime.

One common method is the aggregate method, where the overtime earnings are added to the employee’s regular wages for the pay period. The total amount is then treated as a single payment, and federal income tax is withheld based on the employee’s Form W-4 and the applicable withholding tables. This approach can sometimes result in higher withholding for a pay period if the combined income pushes the total into a higher withholding bracket for that specific period.

Alternatively, employers may use the percentage method, especially when supplemental wages are identified separately from regular wages. Under this method, a flat percentage of the supplemental wage is withheld for federal income tax. The mandatory flat withholding rate is generally 22%. This rate is applied directly to the overtime amount, regardless of the employee’s regular earnings or W-4 elections.

It is important to understand that the amount withheld through either of these methods is an estimate of your annual tax liability. This withholding is designed to ensure that you pay taxes throughout the year, rather than owing a large sum at tax filing time. While the higher withholding on overtime might appear as if overtime is taxed at a higher rate, it is primarily a function of the withholding calculation methods rather than a higher underlying tax rate. This often leads to a larger refund or smaller tax due at the end of the tax year.

Other Payroll Taxes on Overtime

Beyond federal income tax, overtime pay is also subject to other payroll taxes, specifically Social Security and Medicare taxes, collectively known as FICA taxes. These taxes apply to overtime pay in the same manner as they do to regular wages. The employee portion of the Social Security tax rate is 6.2%, and the Medicare tax rate is 1.45%.

The Social Security tax has an annual wage base limit, meaning that earnings above this limit are not subject to Social Security tax. For 2025, the Social Security wage base limit is $176,100. This means that once an employee’s cumulative wages for the year reach this amount, no further Social Security tax is withheld from their earnings, including overtime, for the remainder of the year. The maximum Social Security tax an employee will pay in 2025 is $10,918.20.

In contrast, there is no wage base limit for Medicare tax; all earned wages, including overtime, are subject to the 1.45% Medicare tax. Additionally, an extra 0.9% Medicare tax applies to wages exceeding certain thresholds ($200,000 for single filers, $250,000 for joint filers, and $125,000 for married individuals filing separately). This additional Medicare tax is withheld only from the employee’s portion and applies to all wages above the threshold, including overtime.

State and local income taxes also generally apply to overtime pay in the same way they apply to regular wages. The specific rates and rules for these taxes vary by jurisdiction, but the principle remains that additional earnings from overtime contribute to the total wages subject to these taxes. Employers are required to withhold these taxes according to the rules of the state and locality where the employee works.

How Overtime Affects Your Annual Tax Liability

A common misunderstanding is that overtime pay is taxed at a higher rate than regular wages. This perception often arises from the higher withholding that can occur on overtime earnings, but it does not reflect your actual annual tax liability. Your actual tax liability is determined by your total taxable income for the entire year, including all regular wages and overtime pay.

The federal income tax system uses a progressive tax structure with marginal tax rates and tax brackets. This means different portions of your income are taxed at different rates. For example, the first segment of your income is taxed at the lowest rate, the next segment at a slightly higher rate, and so on. Overtime earnings are simply added to your total income for the year and are taxed according to these established brackets.

Earning more through overtime may push some of your total income into a higher marginal tax bracket. However, this does not mean that all your income, or even all of your overtime pay, will be taxed at that higher marginal rate. Only the portion of your income that falls within that higher bracket is subject to its rate. The income within lower brackets remains taxed at their respective lower rates.

The higher federal income tax withholding on overtime often results in an overpayment of taxes throughout the year. This overpayment typically leads to a larger tax refund when you file your annual tax return, or it reduces the amount you might otherwise owe. The withholding is essentially an estimate, and your true tax burden is only calculated once your total annual income and eligible deductions and credits are accounted for.

Understanding Your Paystub and Tax Documents

Your paystub provides a detailed breakdown of your earnings and withholdings for each pay period. Overtime earnings are typically listed separately from regular wages, allowing you to clearly see the additional compensation. The corresponding tax withholdings for federal income tax, Social Security, and Medicare will also be itemized.

At the end of the year, your employer will issue a Form W-2, Wage and Tax Statement. This document summarizes your total earnings and the taxes withheld for the entire calendar year. Your total wages, including all overtime pay, will be reported in Box 1 of Form W-2, labeled “Wages, tips, other compensation.” This box reflects the gross taxable income used to calculate your federal income tax liability.

Federal income tax withheld from your pay throughout the year, including any amounts withheld from overtime, is reported in Box 2 of your W-2. Social Security wages and tax withheld are shown in Boxes 3 and 4, respectively, while Medicare wages and tax withheld are in Boxes 5 and 6. State and local income tax information, including wages and withheld amounts, are reported in Boxes 16 through 20, if applicable.