What Is the Actual Tax Rate for Overtime?

Overtime pay represents additional earnings for hours worked beyond a standard workweek, often calculated at a rate higher than regular wages, such as one and a half times the usual hourly rate. Many believe these extra earnings are taxed at a uniquely higher rate than regular income.

This perception often leads to misunderstanding. Overtime income is not subject to a special, higher tax rate. Instead, it is considered part of an individual’s total gross income for tax purposes. The appearance of higher taxes on overtime pay frequently stems from specific rules concerning how taxes are initially withheld.

How Overtime Wages are Taxed

Overtime pay, like all other earned income, is subject to federal income tax, state income tax (where applicable), and federal payroll taxes, including Social Security and Medicare contributions. These amounts are added to an employee’s regular wages to determine their total gross income for the pay period and tax year.

The tax system uses a progressive structure, meaning higher income levels face higher marginal tax rates. When an individual earns overtime, this additional income increases their total taxable earnings. This can push a portion of their income into a higher marginal tax bracket. However, only the income within that higher bracket is taxed at the increased rate, not the entire income.

For example, if regular wages place an individual in a 12% marginal tax bracket, and overtime pushes total income into the 22% bracket, only the income exceeding the 12% bracket’s upper limit is taxed at 22%. Income earned up to that limit remains taxed at 12% or lower. This ensures additional earnings are taxed incrementally.

Social Security tax is 6.2% on earnings up to an annual wage base limit ($176,100 for 2025). Medicare tax is 1.45% on all earned income, with no wage base limit. These payroll taxes apply equally to regular wages and overtime earnings; the rates do not change for overtime.

Understanding Overtime Withholding

The common belief that overtime is taxed at a higher rate often arises from the amount of tax initially withheld from an overtime paycheck, not the actual tax liability. Tax withholding is the amount an employer estimates and deducts from each paycheck to send to tax authorities. This differs from an individual’s actual tax liability, which is the total amount of tax owed for the entire year, determined when annual tax returns are filed.

Employers treat overtime as “supplemental wages,” which are payments in addition to an employee’s regular wages. Examples include bonuses, commissions, and severance pay. The Internal Revenue Service (IRS) provides guidelines for how employers should withhold federal income tax from these payments.

There are two primary methods employers use for withholding federal income tax from supplemental wages:
The percentage method (flat rate method): This method is used when supplemental wages are identified separately or exceed a certain threshold. For federal income tax, the flat withholding rate for supplemental wages up to $1 million is 22%. Amounts over $1 million are subject to a mandatory 37% rate. This flat rate applies regardless of an individual’s regular income or W-4 elections, often resulting in a higher percentage withheld than on regular pay.
The aggregate method: Under this approach, the employer combines supplemental wages with the employee’s regular wages for that pay period. The total is then treated as a single payment, and withholding is calculated as if this combined amount were the employee’s regular pay. This can result in higher withholding for that paycheck, as the combined income may appear to place the employee in a higher tax bracket.

Both Social Security and Medicare taxes are withheld at their standard rates under either method, as these payroll taxes do not have special withholding rules for supplemental wages.

How Your Overall Tax Liability is Determined

While withholding aims to approximate an individual’s annual tax obligation, it is merely an estimate, not the final amount owed. The true tax rate for all income, including overtime earnings, is determined when an individual files their annual income tax return. This filing reconciles the total tax withheld with the actual tax liability based on the year’s complete financial picture.

An individual’s actual tax liability is calculated based on their total taxable income for the entire year, after accounting for all eligible deductions and credits. Deductions, like the standard deduction or itemized deductions, reduce taxable income. For instance, in 2025, the standard deduction is $15,750 for a single individual and $31,500 for married individuals filing jointly. Tax credits, such as the Child Tax Credit, directly reduce the amount of tax owed.

The tax return process involves calculating total gross income, subtracting deductions to arrive at taxable income, and then applying federal tax bracket rates. Credits are then applied to reduce the tax bill. If the amount withheld exceeds the actual tax liability, the taxpayer receives a refund. If too little was withheld, the taxpayer will owe additional tax.

This annual reconciliation clarifies that overtime pay is taxed at the same marginal rates as any other income, once all earnings, deductions, and credits are considered for the full tax year. The perceived higher tax on overtime is primarily a function of accelerated withholding mechanisms designed to prevent underpayment, rather than a distinct, higher tax rate.