Why Is Overtime Taxed More? A Look at Your Paycheck

Many individuals wonder if their hard-earned overtime income is subject to higher taxes, often feeling that a larger portion disappears from these extra earnings. This perception, while common, stems from how tax withholding works rather than a separate, elevated tax rate specifically for overtime. This article will clarify why people might believe overtime is taxed more and explain the actual mechanics of the U.S. tax system.

How Income Tax Withholding Works

The U.S. operates on a progressive income tax system, meaning higher income levels are subject to higher marginal tax rates. For federal income tax, rates can range from 10% to 37%. Employers are legally obligated to withhold income tax from employee paychecks, acting as an advance payment toward an individual’s annual tax liability.

This withholding is based on an estimate of an employee’s annual income, using information provided on their Form W-4 and IRS tax withholding tables. When an employee works significant overtime, their pay for that period increases, leading employers to project a higher annual income. Consequently, a larger amount of tax is withheld from that specific paycheck, as if the increased income level would be sustained throughout the entire year. This proportional increase in the amount withheld contributes to the misconception that overtime itself is taxed at a higher rate.

Understanding Your Paycheck

A typical paycheck begins with gross pay, which is the total earnings before any deductions. This includes both regular wages and any overtime compensation. From this gross amount, various taxes and deductions are withheld, leading to your net pay, or take-home pay. These withholdings commonly include federal income tax, state income tax (if applicable), and Federal Insurance Contributions Act (FICA) taxes.

FICA taxes comprise Social Security and Medicare taxes. For 2025, the Social Security tax rate is 6.2% for employees on wages up to $176,100, while the Medicare tax rate is 1.45% on all wages. An additional Medicare tax of 0.9% applies to wages exceeding $200,000 in a calendar year. When overtime increases gross pay, the dollar amount withheld for all these taxes naturally rises, even though the underlying tax rates for Social Security and Medicare remain constant. This larger total withholding on a higher-earning paycheck can create the impression of a higher tax rate on overtime.

The Annual Tax Calculation

The actual tax liability for an individual is determined only once a year when their federal income tax return is filed. At this point, all income earned throughout the year, including both regular wages and overtime, is aggregated. The progressive tax brackets are then applied to this total taxable income, not to individual paychecks or specific types of earnings like overtime. This means that overtime income is not subject to a separate, higher tax rate than regular income when the final tax bill is calculated.

Any perceived “over-withholding” that occurred during the year due to fluctuating income from overtime typically results in a larger tax refund. Alternatively, it can lead to a smaller tax bill owed when the annual return is submitted. The goal of tax withholding is to ensure that taxpayers meet their obligations throughout the year. Therefore, the higher withholding on overtime paychecks is generally a mechanism to align estimated payments with a potentially higher annual income, which is reconciled at tax filing time.

Factors Affecting Withholding

Several other variables influence the amount of tax withheld from a paycheck, which can sometimes be mistakenly attributed to overtime being taxed more. The information an employee provides on Form W-4, such as their filing status (e.g., single, married filing jointly) and any additional withholding amounts requested, directly impacts how much tax is withheld. The W-4 form, updated in 2020, no longer uses withholding allowances but instead focuses on filing status, multiple jobs, tax credits, and other adjustments.

Pre-tax deductions also play a role in reducing taxable income before withholding calculations. These can include contributions to retirement plans like a 401(k) or premiums for health insurance. Such deductions lower the amount of income subject to federal and, in many cases, state income tax withholding, potentially leading to a larger take-home amount. Other income sources or changes in personal circumstances, like getting married or having dependents, also necessitate updating one’s W-4 to ensure accurate withholding.