Is Overtime Taxed More Than Regular Pay?

Many individuals wonder if overtime earnings are taxed at a higher rate than regular wages. This confusion often stems from observations on pay stubs, where a larger portion of overtime pay seems to disappear due to deductions. This article clarifies how the Internal Revenue Service (IRS) treats these extra earnings and why it might appear to be taxed differently.

The Basics of Income Taxation

The United States uses a progressive income tax system, where different portions of an individual’s income are taxed at increasing rates. This means higher-income individuals pay a larger percentage of their income in taxes. The federal income tax system has graduated tax brackets, with rates ranging from 10% to 37% for the 2024 tax year.

Taxable income is the basis for calculating your income tax liability. It includes all earned income, such as wages, salaries, bonuses, and tips. To arrive at taxable income, certain deductions, like contributions to retirement plans or health insurance premiums, are subtracted from your gross income. The IRS uses this resulting figure to determine your applicable tax bracket and the amount of tax you owe.

Overtime and Your Taxable Income

Overtime pay is not taxed at a higher rate than your regular wages. From a tax rate perspective, there is no distinction between the two. Both regular and overtime earnings are simply added together to form your total gross income for a given pay period.

This combined gross income is then subject to the same marginal tax rates as any other income you earn. For example, if your regular pay puts you into a 12% tax bracket, and your overtime pushes your total income into the 22% bracket, only the portion of your income that falls within the 22% bracket will be taxed at that higher rate. The initial portion of your income remains taxed at the lower rates. Overtime merely increases your overall income, which can place more of your earnings into higher tax brackets.

How Overtime Withholding Works

The perception that overtime is taxed more heavily often stems from how taxes are withheld from your paycheck, rather than the actual tax rate applied. Employers are generally required to withhold income taxes from employee wages throughout the year. For overtime, which the IRS often classifies as “supplemental wages,” employers have specific methods for calculating this withholding.

Two common methods for withholding federal income tax on supplemental wages are the aggregate method and the flat rate method. Under the aggregate method, your employer combines your supplemental wages with your regular wages for that pay period and calculates withholding as if the entire amount is a single payment. This method uses your Form W-4 and IRS withholding tables to determine the appropriate amount.

The flat rate method, often simpler for employers, withholds a flat percentage from supplemental wages, separate from regular pay. For supplemental wages up to $1 million in a calendar year, the federal flat rate is 22%. Amounts exceeding $1 million are subject to a mandatory 37% rate. This flat rate, especially 22%, can be higher than an individual’s marginal tax rate, causing a larger proportion of the overtime check to be withheld and creating the impression of higher taxation.

Withholding Versus Final Tax Liability

It is important to understand that the amount withheld from your paycheck is an estimate of your annual tax liability. This estimated withholding, whether from regular pay or overtime, is remitted to the IRS throughout the year. The actual tax owed is not determined until you file your annual income tax return, typically using Form 1040.

When you file your tax return, all your income for the year, including regular wages, overtime, and other earnings, is aggregated. Your final tax liability is then calculated based on this total income, along with any applicable deductions, credits, and your filing status. If the total tax withheld from your paychecks exceeds your actual tax liability, you will receive a tax refund. Conversely, if too little tax was withheld, you will owe additional tax to the government when you file.