Overtime Pay Tax: How It Works and How It Affects Your Paycheck
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If you’ve been working extra hours and seeing bigger paychecks, you might be wondering how that extra money will be taxed. Overtime pay tax is something every employee earning overtime should understand, not just so you can prepare for tax season, but also so you know why your paycheck might look smaller than expected after those extra hours.
This article breaks down how overtime is taxed, why withholdings might seem high, tax law changes, and where to find official resources to help you manage your overtime pay tax effectively.
Overtime Pay Is Taxed Like Regular Wages
Despite the higher hourly rate for overtime, usually “time-and-a-half,” overtime pay isn’t taxed at a special rate. It’s simply added to your regular wages and taxed as ordinary income.
That means overtime is subject to:
- Federal income tax
- State and local income tax (if applicable)
- Social Security and Medicare taxes (FICA)
However, because overtime increases your total earnings in a pay period, it can make it look like you’re paying more tax than usual. This is often due to the way withholding works, not because the overtime pay tax rate is actually higher.
How Employers Withhold Tax on Overtime
Employers use one of two main methods to withhold tax from overtime pay:
- Aggregate method – Overtime is combined with your regular wages for the pay period, and withholding is calculated on the total amount.
- Supplemental wage method – Overtime is treated as supplemental pay and taxed at a flat federal rate (currently 22%) for income tax withholding.
Your employer decides which method to use. The flat-rate method often results in a larger withholding on the paycheck where you earned overtime, but this doesn’t necessarily mean you’ll owe more tax at the end of the year. Any extra withholding is reconciled when you file your tax return. Understanding which method applies to your overtime pay tax can help you anticipate paycheck fluctuations.
Payroll Taxes Still Apply to Overtime
On top of income tax withholding, overtime earnings are subject to FICA taxes:
- Social Security tax – 6.2% on wages up to the annual limit ($168,600 for 2024; this limit may increase in 2025).
- Medicare tax – 1.45% on all wages, plus an additional 0.9% for individuals earning over $200,000.
These payroll taxes apply regardless of whether your overtime is taxed using the aggregate or supplemental method. Even if new deductions reduce your overtime pay tax liability, payroll taxes will still be withheld.
Temporary Federal Change: “No Tax on Overtime” Provision
A recent federal law introduced a temporary deduction for certain “qualified overtime compensation” for tax years 2025 through 2028.
Here’s how it works:
- You may be able to deduct the overtime premium portion of your pay (the extra half of “time-and-a-half”).
- The deduction is capped — up to $12,500 for single filers and $25,000 for joint filers.
- It phases out for higher-income earners.
- Only certain overtime pay qualifies, and employers will need to report it accurately.
Since the rules are new, the IRS will issue guidance to clarify eligibility and reporting requirements. If you earn significant overtime, this deduction could lower your overtime pay tax during those years.
Overtime and State Taxes
Most states treat overtime exactly like regular wages for tax purposes. Your overtime pay is added to your income and taxed at the state rate.
Some states — such as California and New York — have progressive income tax rates, meaning higher income could push part of your earnings into a higher tax bracket. This is the same principle as with federal taxes, only the income above the bracket threshold is taxed at the higher rate. Knowing your state’s rules will help you estimate your full overtime pay tax impact.
Steps to Manage Your Overtime Pay Tax
If you earn overtime regularly or in large amounts, you can take proactive steps to avoid surprises at tax time:
- Review your paystubs – Make sure your overtime hours and rates are correct, and note how much tax is being withheld.
- Check your withholding – Use the IRS Tax Withholding Estimator to see if your current W-4 settings will cover your increased earnings.
- Consider adjusting your W-4 – If overtime will significantly increase your annual income, you may want to have extra tax withheld to cover your overtime pay tax obligation.
- Save part of your overtime pay – Set aside 10–25% of your overtime earnings for taxes if your withholding isn’t adjusted.
- Ask HR or payroll – Find out if your employer uses the supplemental wage method or the aggregate method for overtime withholding.
Common Questions About Overtime Pay Tax
Will overtime push me into a higher tax bracket?
Possibly, but only the portion of your income above the bracket threshold is taxed at the higher rate. Your entire income doesn’t get taxed more.
Why did my overtime paycheck seem so small?
If your employer uses the flat 22% federal supplemental rate for withholding, your check might feel smaller than expected. This could balance out when you file your taxes and calculate your final overtime pay tax owed.
Can I get a refund for extra withholding?
Yes. If more tax was withheld than you owe for the year, you’ll receive a refund after filing your return.
Helpful Resources
- U.S. Department of Labor — Overtime Pay
- IRS Publication 15 — Employer’s Tax Guide
- IRS Publication 15-T — Federal Income Tax Withholding Methods
- IRS Publication 505 — Tax Withholding and Estimated Tax
Key Takeaway
Overtime pay tax follows the same rules as regular wage tax, but how your employer withholds can make it feel different in your paycheck. The new temporary “No Tax on Overtime” deduction, and the rules for the next few years may be more favorable than before.
To make the most of your overtime earnings, check your withholding, track your paystubs, and read IRS updates. If you’re unsure about your specific situation, consult a tax professional, especially if overtime makes up a significant portion of your income.
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Disclaimer: This article is intended for informational purposes only. It provides general information and is not intended and should not be construed as professional advice. The author is not your attorney, accountant, financial planner or any other professional and no professional-client relationship is created. We do not represent that the information provided is accurate or up-to-date as laws and regulations are always changing. If you have an issue that requires professional help, you should contact the appropriate professional to help you on your on your specific set of facts. Please read the Terms and Conditions for additional information.
Article: Overtime Pay Tax. Check out our HR compliance site: www.NEHumanCapital.com.
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