What Is Overtime Taxed At? A Look at Rates & Deductions

Overtime pay, defined by federal standards like the Fair Labor Standards Act (FLSA) as hours worked over 40 in a workweek, is paid at least one and one-half times an employee’s regular rate. Its tax treatment often leads to questions. This article clarifies how overtime earnings are taxed and details associated tax obligations.

How Overtime Wages are Taxed

Overtime wages are not taxed at a special, higher rate compared to regular earnings. For federal income tax purposes, overtime is considered “ordinary income.” These earnings are added to an employee’s total gross income, increasing their annual taxable income.

The United States employs a progressive tax system, meaning higher income levels are subject to higher tax rates. Tax liability is determined by a series of marginal tax brackets, where each portion of income is taxed at a specific rate. While earning overtime can increase a taxpayer’s total income, potentially pushing them into a higher marginal tax bracket, only the income falling within that higher bracket is taxed at the increased rate. The income earned in lower brackets remains taxed at those respective lower rates. Therefore, the actual tax rate applied to overtime earnings is simply the marginal rate applicable to that specific income level within the overall annual income.

Understanding Overtime Withholding

Many employees perceive their overtime pay as being taxed more heavily than regular wages, a perception stemming from federal income tax withholding methods rather than the actual tax rate. The Internal Revenue Service (IRS) classifies overtime as “supplemental wages.” Employers have two primary methods for withholding federal income tax from these wages.

One method is the aggregate method, where the employer combines supplemental wages with regular wages. The tax is then calculated on this combined amount using the employee’s Form W-4 and applicable tax tables. This approach can result in a higher withholding percentage because the combined income appears to place the employee in a higher tax bracket for that single period, leading to a larger immediate deduction.

Alternatively, for supplemental wages up to $1 million in a calendar year, employers can use a flat rate method, withholding at 22%. For supplemental wages exceeding $1 million, the excess is subject to a mandatory 37% withholding rate. Withholding is merely an estimation of an employee’s annual tax liability. Actual tax owed is calculated when the employee files their annual tax return, accounting for all income, deductions, and credits.

Other Taxes Applicable to Overtime

Beyond federal income tax, overtime wages are also subject to other mandatory payroll taxes. Overtime earnings are included in wages subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. 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, with no income cap, meaning all covered wages are subject to this tax.

Most states that impose an income tax will also tax overtime wages. While federal changes regarding overtime deductions have been enacted for 2025-2028, these provisions apply only to federal income tax and do not affect state income taxes unless a state enacts similar legislation. Additionally, local income taxes may apply to overtime earnings in some jurisdictions.