Why Does Overtime Get Taxed So Much?

Many individuals who work extra hours often notice a significant reduction in their take-home pay from overtime earnings, leading to the common belief that overtime is taxed at a higher rate. This perception stems from how taxes are withheld from paychecks, rather than the actual tax rate applied to the income. This article clarifies how overtime is taxed, explaining the difference between your true tax liability and the amounts deducted from your earnings. Understanding these distinctions can help demystify why your overtime pay might feel substantially lower.

Understanding Overtime and Tax Brackets

Overtime income is not subject to a higher federal income tax rate than your regular earnings. Instead, all your income, including overtime, is added together to determine your total annual taxable income. This total income then falls into various tax brackets, which are part of a progressive tax system. Progressive taxation means that as your income increases, higher portions of your income are taxed at higher marginal rates.

For example, in a progressive system, the first portion of your income might be taxed at 10%, the next portion at 12%, and so on, up to the highest marginal rate. Your overall federal income tax liability is calculated by applying these different rates to specific income ranges within your total annual income. This means that while earning overtime might push a portion of your income into a higher tax bracket, it does not mean your entire overtime amount is taxed at that higher marginal rate.

How Employers Withhold Taxes from Overtime

Employers follow specific rules for withholding taxes from “supplemental wages,” which can include overtime, bonuses, and commissions. The Internal Revenue Service (IRS) provides two primary methods for employers to calculate federal income tax withholding on these supplemental wages: the percentage method and the aggregate method. The choice of method can significantly impact the amount withheld from an employee’s paycheck.

The percentage method, also known as the flat rate method, is often used when supplemental wages are paid separately or are clearly identified. For most employees, this method involves withholding federal income tax at a flat rate of 22% on supplemental wages. This 22% rate can often be higher than an individual’s effective tax rate, leading to a larger portion of the overtime pay being withheld.

The alternative is the aggregate method, where the employer combines the supplemental wages with the employee’s regular wages for the current or most recent payroll period. The employer then calculates the income tax withholding as if the combined amount were a single payment, using the employee’s Form W-4 information and the IRS withholding tables. After calculating the total withholding on this combined amount, the tax already withheld from the regular wages is subtracted, and the remainder is withheld from the supplemental wages. While this method can be more complex for employers, it often results in withholding that more closely aligns with the employee’s actual tax liability.

Why Your Net Overtime Pay Feels Lower

The feeling that overtime pay is “taxed so much” primarily stems from the withholding methods employers use, particularly the flat 22% rate often applied to supplemental wages. This higher withholding percentage can lead to a larger immediate deduction from your overtime earnings compared to your regular pay, even though your actual year-end tax rate on that income remains the same. Beyond federal income tax withholding, overtime earnings are also subject to other mandatory payroll deductions. These include Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes.

For 2025, the Social Security tax rate is 6.2% for both the employee and employer, applied to wages up to a certain annual limit, which is $176,100 for 2025. The Medicare tax rate is 1.45% for both the employee and employer, with no wage base limit, meaning all earned income is subject to this tax. These FICA taxes, combined with the often-higher federal income tax withholding on supplemental wages, significantly reduce the net amount of your overtime pay, creating the impression of a higher tax burden.

Managing Your Tax Withholding

If you consistently find that too much tax is being withheld from your paychecks, resulting in a large tax refund at year-end, you can adjust your withholding. This adjustment is done by submitting a new Form W-4, Employee’s Withholding Certificate, to your employer. The Form W-4 provides your employer with information, such as your filing status and any additional income or deductions, to calculate the appropriate amount of tax to withhold.

You can reduce the amount of tax withheld by adjusting your Form W-4, for instance, by increasing the number of dependents you claim or by entering a specific amount for other deductions. Conversely, if you want more taxes withheld, you might reduce the number of dependents or add an extra amount to withhold. It is advisable to review your withholding periodically, especially if you experience significant changes in your income, such as consistent overtime, or changes in your personal financial situation like marriage or having children. The IRS Tax Withholding Estimator tool is also available online to help you assess your withholding and make informed adjustments.