Key Takeaways:
- Overtime pay is taxed the same as regular wages, but it can increase your overall tax bill by pushing you into a higher tax bracket.
- Employers must withhold income, Social Security, and Medicare taxes from overtime pay just like standard pay, affecting your take-home amount.
- Increased earnings may lead to reduced eligibility for certain tax credits, like the Earned Income Tax Credit (EITC), especially for low-to-moderate-income workers.
- Working overtime could result in a tax balance due if your withholdings aren’t adjusted to account for your higher annual income.
- Strategies like updating your W-4, saving 20–25% of overtime, or boosting pre-tax contributions can help minimize tax surprises.
- The “One Big Beautiful Tax Deduction Bill,” passed by the U.S. House in May 2025, proposes making overtime pay tax-deductible through 2028, but it has not yet become law and awaits Senate approval.
Overtime pay is an integral part of many workers’ compensation packages, offering earnings for putting in extra hours beyond the standard workweek. While employees may appreciate the boost to their paychecks, questions often arise about how overtime earnings are taxed. Understanding the tax treatment of overtime pay is essential for managing your finances and avoiding unexpected tax bills.
What is Overtime Pay?
Overtime pay refers to the additional compensation employees receive when they work more than the standard number of hours defined by their employer or labor laws. In the United States, the Fair Labor Standards Act (FLSA) generally mandates that non-exempt employees be paid at least 1.5 times their regular rate for hours worked beyond 40 in a workweek.
Let’s look at an example. If an employee earns $20 per hour and works 45 hours in a week, they’ll receive $20 per hour for the first 40 hours and $30 per hour for the additional 5 hours. This results in $150 in overtime pay. Overtime is particularly common in industries like healthcare, retail, manufacturing, and transportation, where demand for services often requires employees to work extended hours.
How is Overtime Pay Taxed?
From a tax perspective, overtime pay is treated as regular income. It is subject to the same federal and state income taxes as standard wages. However, the additional income earned through overtime can have a significant impact on an employee’s overall tax liability.
Is Overtime Taxed More?
No, overtime pay is not taxed at a different rate than your regular wages. It falls under the same federal and state income tax brackets. The confusion often stems from how overtime appears on your paycheck. Your take-home pay might seem smaller due to increased withholdings, but the tax rate itself remains unchanged.
However, working overtime can increase your total annual income, which could bump you into a higher marginal tax bracket. This doesn’t mean all your income is taxed at a higher rate, just the portion that exceeds the threshold for your current bracket. For example, if you cross from the 12% to the 22% federal bracket, only the income above that threshold gets taxed at 22%.
Federal Income Tax
Overtime earnings are added to your gross income, which determines your taxable income for the year. The United States uses a progressive tax system, meaning that higher income levels are taxed at higher rates. For example, if your regular wages place you in the 22% federal income tax bracket, earning overtime could push a portion of your income into the next bracket, which might be taxed at 24%.
To illustrate, consider an employee with an annual salary of $50,000 who earns $5,000 in overtime pay during the year. This additional income increases their total taxable income to $55,000. Depending on their filing status and the applicable tax brackets, the overtime pay might be taxed at a higher rate than their base salary.
State Income Tax
If you live in a state that imposes income taxes, your overtime pay will also be subject to state taxation. Tax rates and brackets vary by state. That said, the impact of overtime pay on your state tax liability depends on where you live and work. For example, states like California have progressive tax rates that could lead to higher state taxes on overtime earnings. On the other hand, states like Texas and Florida do not impose state income taxes at all.
Withholding Taxes
Employers are required to withhold federal and state income taxes from employees’ paychecks, including overtime pay. Withholding amounts are based on the information provided on your Form W-4 and your earnings for the pay period. Because overtime pay increases your earnings, you might notice a larger amount withheld from your paycheck during weeks when you work overtime. However, withholding calculations are not always precise and may not fully account for the increased income. This could potentially affect your tax refund or balance due at tax time.
Other Taxes Applied to Overtime Pay
In addition to federal and state income taxes, overtime pay is subject to Social Security and Medicare taxes. These are collectively known as FICA taxes.
Social Security Tax
The Social Security tax rate is 6.2% on earnings up to a wage base limit, which is $176,100 in 2025. Overtime pay contributes to your total wages. If your annual income exceeds the wage base limit, earnings above this threshold are not subject to Social Security tax. For example, let’s say your regular wages are $150,000 and you earn $30,000 in overtime pay. Only $26,100 of the overtime pay will be subject to the Social Security tax.
Medicare Tax
The Medicare tax rate is 1.45% on all earnings, with no wage base limit. However, an additional Medicare tax of 0.9% applies to earnings above certain thresholds. These are $200,000 for single filers and $250,000 for married couples filing jointly. If your combined regular and overtime earnings exceed these thresholds, the additional tax will apply to the portion of your income above the limit.
Does Overtime Pay Affect Tax Refunds or Owed Taxes?
Overtime pay can impact whether you receive a tax refund or owe additional taxes when you file your return. Because withholding amounts are based on your earnings for each pay period, working overtime might result in higher withholding for those specific weeks. However, if your total annual income increases significantly due to overtime, your overall withholding may not be sufficient to cover the additional tax liability, potentially leading to a balance due.
For instance, assume your withholding was calculated based on a regular annual salary of $50,000 but you earn an extra $5,000 in overtime. The additional income might push you into a higher tax bracket. If your employer did not adjust your withholding to account for this, you could owe taxes when filing your return.
Strategies to Manage Overtime Tax Implications
Working regular overtime can boost your paycheck. However, it may also increase your overall tax burden. By planning ahead, you can smooth out your withholding, avoid surprises at filing time, and keep more of your extra earnings. Here are some strategies.
Adjust Your W-4
Submit a revised W-4 mid-year to withhold a small fixed amount (e.g., $25–$50) or reduce allowances. Use the IRS Withholding Estimator to pinpoint the right extra withholding.
Make Estimated Tax Payments
If you expect substantial overtime, split your expected tax shortfall into four quarterly payments using Form 1040-ES to sidestep underpayment penalties. Don’t forget to do this for state taxes as well using the correct forms.
Automate a Tax Savings Account
Direct 20–25% of each overtime check into a dedicated savings account. Automate the transfer so you never have to think about it.
Boost Pre-Tax Contributions
Increase contributions to a 401(k), HSA, or FSA. Pre-tax deposits reduce your taxable income and counteract “bracket creep” from overtime.
Understand Withholding Methods
Check whether your employer uses the flat 22% rate or aggregates overtime with regular wages. If flat-rate withholding undercovers your liability, ask payroll to switch methods.
Track Hours and Pay
Keep a simple log of hours worked and net pay received. Reviewing pay stubs monthly helps you spot withholding shortfalls early.
Leverage Online Tools
Use tax-planning calculators or apps to model different withholding and income scenarios in real time. Set reminders for W-4 reviews and estimated-payment deadlines.
Consult a Professional
A CPA or enrolled agent can project your full-year tax picture, including overtime, and recommend precise withholding or estimated payment tweaks.
By combining small W-4 tweaks, automated savings, and targeted pre-tax contributions you’ll stay on top of your tax liability and keep your overtime earnings working for you.
Special Considerations
Overtime pay, while financially beneficial, may influence various aspects of your tax situation beyond just the amount owed to the IRS. Understanding these nuances can help you make informed decisions.
Tax Credits and Overtime Pay
Overtime earnings can affect your eligibility for certain tax credits, such as the Earned Income Tax Credit (EITC). The EITC is designed to benefit low-to-moderate-income workers, but it has income limits that vary based on your filing status and number of dependents. If your overtime pay pushes your income above the threshold, you may no longer qualify for the credit or may receive a reduced benefit.
Household Tax Brackets
If you’re married and file jointly, your combined household income determines your tax bracket. Overtime pay earned by one spouse could push the household into a higher bracket, increasing the tax rate applied to the combined income. For example, if one spouse earns $70,000 and the other earns $30,000, their combined income is $100,000. If overtime pay increases the total income to $110,000, the portion of earnings above the $100,000 threshold may be taxed at a higher rate.
Proposed Policy: Trump’s “One Big Beautiful Bill” and Overtime Tax Exemption
In May 2025, the U.S. House of Representatives passed former President Donald Trump’s “One Big Beautiful Bill,” which includes a major tax reform: a new deduction for overtime pay. If this provision becomes law, taxpayers who earn overtime wages could deduct those earnings from their taxable income through 2028, effectively making overtime income tax-free at the federal level. The White House has urged the Senate to pass the bill by July 4, 2025, but it remains under consideration.
Financial Impact on Federal Revenue
The potential cost to the federal government is substantial. A joint study released in April 2025 by the Tax Foundation and Yale’s Budget Lab estimates that removing income tax on overtime pay could reduce federal revenue by $680 billion to $866 billion between 2025 and 2034. This raises concerns about how the government might make up for that shortfall and whether other tax burdens would shift elsewhere.
Labor Market Concerns
Critics warn that while the policy may boost worker take-home pay, it could distort employer behavior. Abir Mandal, a senior policy analyst at the Tax Foundation, wrote:
“By making tips and overtime tax-free, employers may feel less pressure to raise base wages, effectively shifting the burden of compensation onto tax policy rather than payroll. Employers might also restructure pay to favor bonuses or overtime over hiring additional staff, reducing job opportunities and encouraging overwork. Worse, high earners could exploit these exemptions by reclassifying income as tips or bonuses.”
Status and What’s Next
As of mid-June 2025, the bill has not yet passed the Senate. Until it does and is signed into law, overtime pay continues to be taxed as regular income. Workers and employers alike should keep a close eye on legislative updates, as the outcome could significantly affect payroll planning, tax filing strategies, and workforce management in the coming years.
Frequently Asked Questions
Q: Is overtime taxed more for Social Security and Medicare?
A: No. Overtime earnings are subject to the same FICA rates, which is 6.2% for Social Security (up to the wage base) and 1.45% for Medicare (with an additional 0.9% on high earners), as regular wages.
Q: Is overtime taxed more at the state level?
A: Overtime is taxed under your state’s regular income-tax rules. If your state has progressive brackets, the additional income may be taxed at a higher bracket, but there’s no special “overtime rate.”
Q: Is overtime taxed more when I’m a contractor or freelancer?
A: As a contractor, you don’t get FLSA overtime but do pay self-employment tax (15.3% total FICA) on all earnings. There’s no extra income-tax surcharge specifically for overtime.
Q: Is overtime taxed more if it pushes me into a new bracket?
A: Only the portion above the bracket threshold is taxed at the higher rate. Your base salary remains in the lower bracket; overtime income above that threshold faces the higher marginal rate.
Q: Is overtime taxed more for married vs. single filers?
A: Tax brackets differ by filing status. Overtime could push a married couple’s combined income into a higher joint bracket, but overtime itself isn’t taxed at a different rate based on marital status.
Q: Is overtime taxed more when using flat-rate withholding?
A: Employers can withhold overtime at a flat 22% rate (for supplemental wages) or at your marginal rate via the aggregate method. Flat withholding may over- or under-withhold but doesn’t change your ultimate tax rate.
Q: Is overtime going to be taxed in 2025?
A: Yes, overtime is still taxed in 2025. The proposed “One Big Beautiful Bill” may change that, but it hasn’t passed the Senate yet.
Q: Does the Big Beautiful Bill have no tax on overtime?
A: The bill proposes a tax deduction for overtime pay, not full exemption. It’s not law yet and still pending Senate approval.
Tax Help in 2025
Overtime pay provides valuable financial rewards, but it’s important to understand how it affects your tax liability. While overtime earnings are taxed the same as regular income, the additional income can impact your federal and state taxes, Social Security and Medicare taxes, and eligibility for tax credits. By monitoring your earnings, adjusting your withholding, and seeking professional advice, you can effectively manage the tax implications of overtime pay and maximize the benefits of your hard work. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
If You Need Tax Help, Contact Us Today for a Free Consultation