Is Overtime Taxed the Same? How Your Paycheck Is Affected

Overtime pay often raises questions about its taxation, leading many to wonder if these earnings are subject to different rules than regular wages. This article clarifies how overtime is treated for tax purposes, explaining its integration with the overall income tax system and factors influencing your take-home pay.

Understanding Income Tax and Overtime

Overtime pay is considered regular gross income for tax purposes, not taxed at a special or higher rate than standard wages. The federal income tax system operates on a progressive structure, taxing different portions of your total income at increasing marginal rates through tax brackets. For example, in 2025, federal tax rates range from 10% to 37%, applying to various income thresholds depending on your filing status.

When you earn overtime, that additional income is added to your regular pay. Your total annual earnings determine which tax brackets apply. If overtime pushes your income into a higher tax bracket, only the portion within that new bracket is taxed at the increased rate. Income earned within lower brackets remains taxed at their respective lower rates, ensuring a graduated approach to taxation.

A temporary “No Tax on Overtime” deduction, effective January 1, 2025, allows eligible workers to reduce federal taxable income by up to $12,500 in qualified overtime compensation, or $25,000 for joint filers. This deduction targets federal income tax liability and is subject to phase-out rules for higher earners. It is a deduction from federal taxable income, not an exemption from all taxes on overtime, and does not affect other payroll taxes like Social Security or Medicare. This deduction generally lowers your final federal income tax bill when you file your annual tax return, rather than affecting immediate paycheck withholding.

How Payroll Withholding Works

The perception that overtime is taxed at a higher rate often stems from how payroll withholding is calculated. Tax withholding is the estimated amount employers deduct from each paycheck and remit to tax authorities. When you receive overtime pay, your gross income for that specific pay period increases significantly, leading to a larger amount being withheld.

Employers use methods for calculating withholding on supplemental wages, such as overtime, which can result in higher immediate deductions. One common approach is the aggregate method, where supplemental wages are combined with regular wages for the pay period, and withholding is calculated as if the total amount is a single, annualized payment. This method can project a higher annual income than an employee might actually earn, resulting in a larger portion of the overtime pay being withheld.

Another method is the percentage method, where a flat rate is applied to supplemental pay. For most supplemental wages, a flat 22% federal income tax withholding rate applies. Regardless of the method, increased withholding on an overtime paycheck is an estimation. Your final tax liability is determined when you complete and submit your annual income tax return. An employee’s Form W-4 influences these calculations and can be adjusted if withholding is inaccurate.

Other Deductions Affecting Overtime Pay

Beyond federal income tax withholding, several other mandatory and voluntary deductions impact the net amount of overtime pay received. Understanding these additional subtractions is important for comprehending your full compensation.

Federal Insurance Contributions Act (FICA) taxes are a mandatory deduction applied to all wages, including overtime. FICA comprises Social Security and Medicare taxes. For 2025, the Social Security tax rate is 6.2% for employees, applied to earnings up to an annual wage base limit of $176,100. The Medicare tax rate is 1.45% for employees, and unlike Social Security, it has no wage base limit. An additional Medicare tax of 0.9% applies to individual earnings exceeding $200,000 in a calendar year, without regard to filing status.

In addition to federal taxes, state and local income taxes may also be withheld from your overtime pay, depending on where you reside and work. These taxes are applied according to the specific laws and rates of the relevant jurisdiction. States that impose an income tax will apply their rates to your total earnings, including any overtime.

Pre-tax deductions also influence your take-home overtime pay by reducing your taxable gross income. Contributions to retirement accounts, such as traditional 401(k)s, or health savings accounts (HSAs), and premiums for employer-sponsored health insurance plans are common examples. These deductions are subtracted from your pay before income taxes are calculated, lowering the amount of income subject to federal, and often state and local, income taxes. Conversely, post-tax deductions are taken from your paycheck after all applicable taxes have been withheld. Examples include contributions to Roth 401(k) plans, union dues, or wage garnishments. These deductions do not lower your taxable income for the period.