What Percent Is Overtime Taxed and How Does It Work?

Many people mistakenly believe overtime pay is taxed at a higher rate than regular wages. For federal income tax purposes, overtime earnings are considered part of an employee’s total gross income. The perceived difference in taxation stems from how taxes are withheld, not a distinct tax rate. A recent federal provision introduces a deduction for qualified overtime, which impacts federal income tax liability but does not change how payroll taxes are applied.

How Overtime Wages Are Taxed

Overtime pay is treated as ordinary income. Additional earnings from overtime combine with regular wages to determine total taxable income for a pay period and the entire tax year. This applies consistently across federal income tax, Social Security, and Medicare taxes.

Social Security and Medicare taxes are applied as flat percentages to earnings. For 2025, the Social Security tax rate is 6.2% for both the employee and employer, applicable up to an annual wage base limit of $176,100. Medicare tax is assessed at 1.45% for both employee and employer contributions, with no wage base limit. An additional Medicare tax of 0.9% applies to individual wages exceeding $200,000.

A new federal income tax deduction for qualified overtime, enacted for tax years 2025 through 2028, does not alter the application of Social Security and Medicare taxes to overtime earnings. These payroll taxes continue to be withheld from all overtime pay. The deduction specifically targets federal income tax liability.

How Income Tax Withholding Applies to Overtime

Individuals often perceive overtime as being taxed more heavily due to employer income tax withholding methods. When supplemental wages, such as overtime, are paid, employers typically use one of two primary federal income tax withholding methods. These methods estimate annual tax liability and ensure amounts are remitted to the IRS.

One common approach is the percentage method. If supplemental wages are paid separately or clearly identified, they are frequently subject to a flat 22% federal income tax withholding rate for amounts up to $1 million. This fixed percentage is a withholding rate, not the actual tax rate that will apply to the income at year-end. For supplemental wages exceeding $1 million, a mandatory withholding rate of 37% applies to the excess.

Alternatively, if supplemental wages are combined with regular wages and not separately identified, employers might use the aggregate method. This method adds overtime pay to the employee’s regular wages for the current pay period. The total is treated as a single payment, and withholding is calculated based on the employee’s Form W-4 and applicable IRS withholding tables. This can result in a larger amount being withheld from that specific paycheck, as the combined income might temporarily push the withholding into a higher marginal withholding bracket for that period.

How Your Total Income Affects Overtime Taxation

The United States operates under a progressive income tax system, meaning different portions of income are taxed at varying rates. As taxable income increases, it moves into higher tax brackets. Earning overtime does not mean all income is taxed at a higher rate; only the additional income that pushes you into a new bracket will be subject to that higher marginal rate.

Your final federal income tax liability is determined by your total annual taxable income, including all regular and overtime wages, reduced by deductions and credits. The “One Big Beautiful Bill Act,” effective for tax years 2025 through 2028, allows a federal income tax deduction for “qualified overtime compensation.” This deduction can be up to $12,500 for single filers and $25,000 for those filing jointly, and it specifically applies to the premium portion of overtime required by the Fair Labor Standards Act (FLSA). This deduction is claimed on individual federal tax returns and phases out for higher-income earners.

The effective tax rate, the actual percentage of your total income paid in taxes, is often lower than your marginal tax rate. This is because it considers all income taxed across different brackets, deductions, and credits. Withholding is an estimate of your annual tax obligation, reconciled when you file your annual tax return. If too much was withheld, you receive a refund; if too little, you will owe additional taxes.