What Is the Overtime Tax Rate on Your Paycheck?

Many employees believe overtime pay is subject to a unique and higher tax rate, leading to the misconception that extra earnings are disproportionately taxed. This stems from how overtime wages are processed and taxed at the source, rather than actual tax laws. Understanding the nuances of federal and state tax regulations surrounding overtime can clarify why paychecks with overtime hours may look different from regular paychecks. This article demystifies overtime taxation, explaining its definition, tax application, and employer withholding methods.

Understanding Overtime Pay

Overtime pay compensates employees for working hours beyond a standard workweek. Under the Fair Labor Standards Act (FLSA), the federal law governing overtime, non-exempt employees must receive overtime pay for all hours worked over 40 in a workweek. A workweek is defined as a fixed and regularly recurring period of 168 hours, or seven consecutive 24-hour periods. There is no federal limit on the total hours an employee aged 16 or older may work in a workweek.

The FLSA mandates that the overtime rate must be at least one and one-half times an employee’s regular rate of pay, commonly known as “time-and-a-half.” While federal law sets this baseline, individual states may have their own labor laws that provide for different or more generous overtime provisions.

How Overtime is Taxed

A widespread belief is that overtime earnings are taxed at a higher or separate rate, but this is not accurate under federal tax law. There is no specific “overtime tax rate” distinct from the rates applied to regular wages. Instead, overtime pay is considered ordinary income and is fully subject to the same progressive federal income tax brackets as all other earned wages. This means that overtime earnings are simply added to an employee’s total gross income.

Increased earnings from overtime may push an individual’s total income into a higher federal income tax bracket. If this occurs, only the portion of income exceeding the threshold for the new, higher bracket is taxed at that elevated rate. Income falling within lower brackets remains taxed at those respective, lower rates. Overtime wages are also subject to Social Security (FICA) and Medicare taxes, which apply to all earned income at standard rates. State and local income taxes also apply to overtime earnings in the same manner as regular wages.

For tax years 2025 through 2028, a new provision allows individuals to deduct a portion of their qualified overtime compensation from federal taxable income. This deduction, up to $12,500 for single filers and $25,000 for joint filers, specifically targets the “half” portion of time-and-a-half overtime pay. The deduction phases out for taxpayers with modified adjusted gross incomes exceeding $150,000 for single filers and $300,000 for joint filers. This is a federal income tax deduction and does not affect the application of federal payroll taxes or state and local taxes to overtime earnings.

Withholding on Overtime Pay

The perception that overtime is taxed at a higher rate often stems from how federal income tax is withheld from these earnings. The Internal Revenue Service (IRS) classifies overtime pay as “supplemental wages,” which are payments made to an employee in addition to their regular wages. Other examples of supplemental wages include bonuses, commissions, and severance pay. Employers generally have two primary methods for calculating federal income tax withholding on supplemental wages, as outlined in IRS Publication 15.

One method is the percentage method, also known as the flat rate method. If supplemental wages are paid separately or clearly identified on a pay stub, employers can withhold federal income tax at a flat rate of 22% for amounts up to $1 million paid during a calendar year. This fixed percentage can result in higher withholding than an employee’s actual marginal tax rate, especially for those in lower tax brackets, contributing to the feeling of being “overtaxed.” For supplemental wages exceeding $1 million in a calendar year, the mandatory withholding rate on the excess increases to 37%, which aligns with the highest federal income tax rate.

Alternatively, employers may use the aggregate method, particularly when supplemental wages are combined with regular wages in a single payment and not separately identified. Under this method, the employer adds the supplemental wages to the employee’s regular wages for that pay period. Federal income tax withholding is then calculated on this combined total as if it were a single payment, taking into account the employee’s Form W-4 and IRS withholding tables. The amount of tax already withheld from regular wages is subtracted, and the remaining tax is withheld from supplemental wages. These withholding practices collect estimated tax throughout the year and do not represent an employee’s final tax liability.

Impact on Your Overall Tax Liability

While withholding methods for overtime pay can lead to a larger portion of earnings being held back, it is important to distinguish between withholding and actual tax liability. An employee’s final federal income tax liability is determined by their total annual income, including all regular and overtime earnings, when they file their income tax return for the year. The amount withheld from each paycheck is merely an estimate of the taxes owed. Over-withholding on overtime pay typically results in a larger tax refund when the tax return is filed. Conversely, under-withholding could lead to a tax bill at year-end.

Employees can adjust their withholding to better align with their expected annual tax liability by submitting a new Form W-4, Employee’s Withholding Certificate, to their employer. Adjustments can involve modifying the number of dependents claimed or specifying an additional dollar amount to be withheld on line 4(c) of Form W-4. The IRS provides an online Tax Withholding Estimator, a tool that helps employees determine appropriate withholding to avoid significant overpayment or underpayment. By proactively managing their Form W-4, individuals earning substantial overtime can optimize withholding to reduce excessive amounts held from paychecks.