Is Overtime Taxed Differently Than Regular Pay?

Many individuals wonder if overtime earnings are taxed differently than regular wages, often due to larger tax deductions from overtime paychecks. Overtime pay is compensation for hours worked beyond a standard workweek, typically at a higher rate. This article clarifies how overtime pay is treated for tax purposes, explaining why withholding may appear different and its impact on total tax obligations.

How Overtime Pay Is Taxed

Overtime pay is considered regular income for tax purposes and is not subject to a different tax rate than standard wages. Federal income tax, state income tax (if applicable), Social Security, and Medicare taxes apply to overtime earnings in the same way they apply to regular earnings.

All income, including overtime, is subject to federal income tax, calculated based on progressive tax brackets. This means different portions of total income are taxed at increasing rates. For example, a lower portion might be taxed at 10%, while a higher portion could be taxed at 22%. State income taxes, where applicable, generally follow a similar progressive structure or a flat rate.

Social Security and Medicare taxes, known as Federal Insurance Contributions Act (FICA) taxes, are also withheld from overtime pay. For 2025, the Social Security tax rate is 6.2% for both employees and employers, applied to wages up to an annual limit of $176,100. The Medicare tax rate is 1.45% for both employees and employers, with no wage limit. An additional Medicare tax of 0.9% applies to individual incomes exceeding $200,000, or $250,000 for those married filing jointly.

While the tax rate on overtime is the same as regular pay, substantial overtime can increase total annual income. This higher income might push a portion of earnings into a higher federal or state income tax bracket. Only income within the higher bracket is taxed at that increased rate, not the entire income. For instance, if overtime causes income to exceed a bracket threshold, only the amount above that threshold is taxed at the higher rate.

A new, temporary federal income tax deduction for qualified overtime compensation is effective for tax years 2025 through 2028. Individuals can deduct up to $12,500, and joint filers up to $25,000, of the premium portion of overtime pay required by the Fair Labor Standards Act (FLSA). This deduction is subject to Adjusted Gross Income (AGI) limits, phasing out for single filers with AGI over $150,000 and for joint filers over $300,000. This deduction lowers taxable income but does not change how employers withhold taxes from overtime wages.

Understanding Overtime Withholding

The amount of tax withheld from an overtime paycheck may appear higher, leading to the misconception that overtime is taxed at a different rate. This difference is due to how employers calculate tax withholding, not a change in the actual tax rate. Withholding is an estimate of annual tax liability, collected by the employer from each paycheck, while actual tax liability is determined when filing an annual tax return.

Overtime pay is often classified as “supplemental wages” by the IRS, which also includes bonuses, commissions, and severance pay. Employers use specific methods for calculating federal income tax withholding on these supplemental wages, as outlined in IRS Publication 15.

One common method employers use is the percentage method, also called the flat rate method. For supplemental wages up to $1 million in a calendar year, employers can withhold federal income tax at a flat rate of 22%. This method is often chosen for simplicity, especially if supplemental wages are paid separately. For supplemental wages exceeding $1 million, the mandatory flat rate increases to 37%.

The other method is the aggregate method, where the employer combines overtime pay with regular wages for that pay period. The total combined amount is treated as a single payment, and federal income tax withholding is calculated based on the employee’s Form W-4 and IRS withholding tables. This method can lead to a higher percentage of tax being withheld from that paycheck because the combined income might temporarily push the employee into a higher withholding bracket for that pay period.

Regardless of the method used, higher withholding from an overtime paycheck does not mean the overtime is taxed at a higher rate. It is an employer’s way of estimating and collecting federal income tax throughout the year to help prevent a large tax bill at year-end. Employers must continue withholding taxes from overtime compensation, despite any new deductions available to employees.

How Overtime Affects Your Annual Tax Liability

Taxes withheld from paychecks throughout the year, including those from overtime, are prepayments towards your total annual tax liability. This final liability is calculated when you file your federal income tax return, typically Form 1040, and considers your entire annual income, including all regular wages and overtime earnings. Your actual tax owed is also reduced by eligible deductions and credits.

If more tax was withheld than you owe for the year, you will receive a tax refund after filing your return. This can happen if significant overtime was subject to higher withholding under the aggregate method, or if the 22% flat rate was applied to limited overtime. Conversely, if too little tax was withheld, you may owe additional tax.

Regularly working overtime may necessitate reviewing and adjusting your Form W-4 with your employer. This form guides your employer on how much federal income tax to withhold. Updating your W-4 can better align withholding with your actual tax liability, potentially avoiding a large refund or an unexpected tax bill.

Increased income from overtime can also impact eligibility for certain tax credits or deductions, or influence limitations based on your Adjusted Gross Income (AGI). For example, the availability of credits like the Earned Income Tax Credit (EITC) or specific education credits may be reduced or phased out as AGI increases. Similarly, the deductibility of some expenses, like student loan interest, also phases out with higher AGI. These impacts are a function of overall increased income and are important for comprehensive tax planning.