Is Your Overtime Pay Taxed Differently?

While the actual tax rate on overtime earnings is generally the same as regular pay, the method used for tax withholding can create a different perception. Understanding how both types of wages are handled for tax purposes can clarify why your take-home pay might vary.

Taxation of Regular Wages

Regular wages are subject to several types of taxes. Federal income tax is applied based on a progressive tax system. State income tax may also be withheld, depending on the state where you work.

Beyond income taxes, regular wages are also subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. For 2025, the Social Security tax rate for employees is 6.2% on earnings up to $176,100, while the Medicare tax rate is 1.45% on all covered earnings, with no income limit. Employers also contribute matching amounts for FICA taxes. These taxes are withheld according to the information provided on your Form W-4 and standard payroll withholding tables.

Taxation of Overtime Wages

Overtime wages are considered supplemental wages and are not taxed at a higher rate than your regular pay. Instead, they are added to your gross income and are subject to the same marginal tax rates that apply to your total annual earnings.

Employers primarily use two methods for withholding federal income tax on supplemental wages: the aggregate method and the percentage method. Under the aggregate method, the supplemental wages are combined with your regular wages for a pay period, and withholding is calculated as if the total were a single payment. This calculation uses your Form W-4 and the IRS withholding tables, potentially leading to a higher withholding amount in that specific pay period because the annualized income for that period appears larger.

Alternatively, the percentage method can be used if supplemental wages are paid separately from regular wages or are clearly identified on a pay stub. For supplemental wages up to $1 million in a calendar year, a flat federal income tax rate of 22% is withheld. Any supplemental wages exceeding $1 million in a calendar year are subject to a mandatory 37% withholding rate on the excess amount. These are withholding rules, not your final tax liability, which is determined when you file your annual tax return.

Why Withholding Might Seem Different

The methods used for withholding taxes on supplemental wages can result in a higher percentage of your overtime pay being withheld compared to your regular earnings. When the aggregate method is applied, the payroll system might project your annual income based on a single pay period that includes a significant overtime payment. This projection can place you, for withholding purposes, into a higher income bracket, leading to a larger amount of tax being withheld from that particular paycheck. This does not mean the actual tax rate on your annual income changes, but rather the immediate amount taken from your pay.

The percentage method, with its flat 22% or 37% withholding rate, can also contribute to this perception, particularly if your marginal tax rate for your overall income is lower than the flat rate applied. For instance, if your income places you in a 12% marginal tax bracket, but your overtime is withheld at 22%, it might appear that your overtime is taxed more heavily. This difference is solely in the withholding, designed to ensure sufficient taxes are paid throughout the year, and not a reflection of your final tax obligation.

Reviewing Your Withholding

To understand and manage your tax withholding effectively, especially with fluctuating income from overtime, regularly reviewing your pay stubs is a useful practice. Your pay stub details your gross pay, any pre-tax deductions, and the amounts withheld for federal income tax, state income tax, and FICA taxes. This allows you to see how much is being withheld from each type of earning.

Updating your Form W-4 is a proactive step to ensure your employer withholds the correct amount of federal income tax. If your income changes significantly due to consistent overtime, adjusting your W-4 can help align your withholding with your actual tax liability, potentially preventing over-withholding or under-withholding. The IRS offers a Tax Withholding Estimator tool on its website, which can help you determine the appropriate withholding amount for your situation.

Over-withholding results in a tax refund when you file your annual tax return. Conversely, under-withholding can lead to an unexpected tax bill or potential penalties at tax time. Regularly assessing your withholding helps you manage your cash flow more precisely and avoid surprises when tax season arrives.