What Tax Percentage Is Applied to Overtime Wages?

Overtime wages often appear to be taxed at a higher percentage, leading many to believe overtime income is subject to a special, elevated tax rate. However, overtime pay is not taxed differently from regular income; it is simply added to an individual’s total earnings. The appearance of higher taxation is primarily due to how tax withholding rules apply to increased income in a given pay period.

How Overtime Pay is Taxed

Overtime pay is treated as ordinary income and is fully subject to federal, state, and local income taxes, just like regular wages. The federal income tax system is progressive, meaning different portions of income are taxed at increasing marginal rates. While additional income, such as overtime, might push some earnings into a higher marginal tax bracket, it does not mean all earnings are suddenly taxed at that higher rate.

For example, if regular wages place an individual in the 12% marginal tax bracket, and overtime earnings push them into the 22% bracket, only the portion of income within the 22% bracket is taxed at that higher rate. Income within lower brackets remains taxed at their respective lower rates. State and local income taxes also apply to overtime pay in the same manner as regular wages, following their own progressive or flat tax structures. The actual tax liability on total annual income, including overtime, is calculated when an individual files their tax return.

Understanding Overtime Withholding

The perceived “higher tax” on overtime is typically a result of income tax withholding rules, which estimate an individual’s annual tax liability and deduct amounts from each paycheck. Withholding is an estimate, not the final tax owed, and it aims to ensure individuals pay their taxes throughout the year. Employers use various methods to calculate federal income tax withholding, and these methods can significantly impact the amount withheld from overtime pay.

One common approach is the aggregation method, where employers combine regular wages and overtime earnings for a pay period. Federal income tax withholding is then calculated as if this combined gross amount were the employee’s regular pay for the entire year. This method can result in a higher percentage being withheld from the overtime portion, as the system projects a higher annual income and thus a larger tax obligation for that specific pay period. For instance, an individual earning $1,000 in a bi-weekly period might have a certain amount withheld, but if they earn $1,500 due to overtime in one period, the withholding calculation treats that $1,500 as if it were earned consistently, leading to a larger deduction.

Another method for federal income tax withholding on supplemental wages, which often includes overtime, bonuses, and commissions, is the percentage method. If supplemental wages are paid separately from regular wages or identified separately, employers can apply a flat 22% federal income tax withholding rate to amounts up to $1 million for the year. For supplemental wages exceeding $1 million within a calendar year, a mandatory 37% federal income tax withholding rate applies to the amount above that threshold. While these are flat withholding rates, they are not necessarily the individual’s actual tax rate on that income, which is determined by their total annual taxable income and marginal tax brackets.

The information provided on an employee’s Form W-4 also directly influences the withholding calculation. Adjustments made on the W-4, such as claiming dependents, increasing or decreasing additional withholding, or indicating other income, directly impact the amount of federal income tax withheld from each paycheck. Employees can update their W-4 to better align their withholding with their actual tax liability, especially if they regularly work overtime and notice significant discrepancies.

Other Deductions from Overtime Pay

Beyond federal, state, and local income tax withholding, other mandatory and voluntary deductions further reduce an individual’s net overtime pay. These deductions apply to overtime just as they do to regular wages, contributing to the difference between gross earnings and take-home pay.

One significant category is 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 wage base limit, applying to all earned income. An extra 0.9% Medicare tax is imposed on wages exceeding $200,000 for single filers or $250,000 for married couples filing jointly; this additional tax is solely the employee’s responsibility.

State and local income taxes also continue to be withheld from overtime earnings. Some localities may have specific payroll taxes or other deductions that apply to gross pay, including overtime, varying widely by location.

Pre-tax deductions reduce an individual’s taxable income, impacting the amount of income tax withheld from overtime pay. Common pre-tax deductions include contributions to retirement accounts like a 401(k), health insurance premiums, and Flexible Spending Accounts (FSAs). While these reduce income subject to income tax, they still reduce take-home pay.

Estimating Your Overtime Take-Home Pay

Understanding how overtime pay is processed and what deductions apply helps individuals better estimate their net earnings. Regularly reviewing pay stubs is important to monitor how overtime is itemized and what deductions are taken. Pay stubs provide a detailed breakdown of gross pay, withholdings, and net pay, showing the specific impact of overtime.

Utilizing reputable online payroll or tax calculators can also provide a reasonable estimate of net pay, especially when factoring in overtime hours. These tools allow users to input regular wages, overtime hours, and various deductions to calculate a projected take-home amount, bridging the gap between gross overtime pay and the final amount received.

For individuals consistently working overtime, adjusting their Form W-4 can fine-tune withholding. If withholding is consistently too high, resulting in a large tax refund, consider increasing allowances or claiming additional credits. Conversely, if withholding is too low, leading to a tax bill at year-end, decrease allowances or request additional tax be withheld. Consulting IRS resources or a tax professional can provide personalized guidance for W-4 adjustments.