Is Overtime Pay Taxed at a Higher Rate?

Overtime pay is often perceived as being taxed at a higher rate than regular earnings, a common misunderstanding among employees. This perception usually arises from how federal income tax is withheld from these payments, rather than from a distinct, elevated tax rate applied to overtime itself. The actual tax liability on overtime pay is determined by an individual’s total annual income, not by a special tax bracket for extra hours worked. Understanding the difference between tax withholding and actual tax liability helps clarify this important distinction.

Overtime and Your Taxable Income

Overtime pay is considered part of an employee’s gross wages, directly increasing their total income. For federal tax purposes, overtime is treated as regular income; there is no separate “overtime tax bracket” or unique tax rate applied to these additional earnings. While increased income can potentially place an individual into a higher tax bracket, this applies to all income earned, not just the overtime portion. A recent change, the “No Tax on Overtime” provision, allows a deduction for qualified overtime pay. This temporary deduction, effective for tax years 2025 through 2028, permits eligible workers to deduct up to $12,500 ($25,000 for joint filers) from their federal taxable income, though this deduction is claimed when filing annual tax returns and does not impact how the income is initially withheld.

Federal Income Tax Withholding on Overtime

The belief that overtime is taxed at a higher rate stems primarily from federal income tax withholding rules. Overtime pay often falls under the category of “supplemental wages,” which also includes bonuses, commissions, and severance pay. Employers typically use one of two primary methods to withhold federal income tax from supplemental wages.

One common approach is the aggregate method, where employers combine supplemental wages with regular wages for a pay period. The total amount is then treated as a single payment, and withholding is calculated based on the employee’s Form W-4. This method can result in higher calculated withholding for that specific pay period because the increased income temporarily pushes the combined amount into a higher withholding percentage, creating the illusion of a higher tax rate.

The other method is the flat rate method, often used when supplemental wages are identified separately from regular wages. For supplemental wages up to $1 million within a calendar year, employers can withhold federal income tax at a flat rate of 22%. If an employee’s supplemental wages exceed $1 million in a calendar year, the amount above this threshold is subject to a flat withholding rate of 37%. These withholding methods are designed to estimate tax liability throughout the year, but they do not represent the final tax rate applied to the income.

Other Payroll Taxes on Overtime

Beyond federal income tax, overtime pay is also subject to other payroll taxes, specifically FICA taxes (Social Security and Medicare). These taxes apply to overtime earnings in the same manner as they do to regular wages. For Social Security, a tax rate of 6.2% is applied to both the employee and employer, up to an annual wage base limit, which is $176,100 for 2025.

Medicare tax, with a rate of 1.45% for both employee and employer, applies to all wages without a wage base limit. This means every dollar earned from overtime, regardless of total income, is subject to Medicare tax. Additionally, state and local income taxes apply to overtime pay. While specific rules vary by jurisdiction, overtime is treated as regular taxable income for these purposes and is subject to the same state and local withholding rules as regular wages.

Impact on Your Annual Tax Bill

Despite the various withholding methods, an individual’s actual federal income tax liability is determined when they file their annual tax return. The United States employs a progressive tax system, meaning different portions of income are taxed at different rates. As total income increases, higher portions of that income may fall into higher marginal tax brackets.

Overtime pay contributes to this total income, and while it might push a taxpayer into a higher marginal bracket, only the income falling within that higher bracket is taxed at the increased rate, not the entire amount. If the amount withheld throughout the year due to supplemental wage rules exceeds the actual tax owed, the taxpayer will receive a refund. Conversely, if too little was withheld, the taxpayer will owe additional taxes.