Do You Get Taxed More for Overtime?

March 20, 2024 - Friendly Tax Expert

Putting in extra hours at work has its pros and cons. It helps increase your earnings with time-and-a-half pay, yet there's the uncertainty of how much of that 'extra' money you'll actually take home post payroll taxes.

Understanding how overtime pay is taxed is crucial for feeling fairly compensated. If you've been putting in extra hours and questioning if it's worth it, let's simplify the tax implications for you.

What is overtime?

Overtime is any additional hours worked by an employee beyond their regular working hours. This can occur due to various reasons, such as increased workload, meeting tight deadlines, or filling in for a colleague.

In the United States, overtime is typically defined as any hours worked beyond 40 hours in a week. This means that if you work more than 8 hours in a day, but your total for the week does not exceed 40 hours, it will not be considered overtime.

Office worker holding a clock, covered by a tall stack of documents

How is overtime calculated?

In the United States, the standard for overtime is set under the Fair Labor Standards Act (FLSA), which dictates that employees should be paid time-and-a-half their regular rate of pay for any hours worked over 40 in a workweek.

This means that for every hour worked beyond the 40-hour threshold, your hourly wage increases by 50% for the purpose of calculating your final overtime pay. It’s a premium that’s meant to compensate for the additional strain on your time and effort.

But what does this actually look like when it comes to your tax bill?

Do you get taxed more for overtime?

No, overtime pay is taxed just like regular pay, as it is considered part of your gross income. This means it doesn't get a separate, higher tax rate. However, there’s a common misconception that earning overtime will result in all of your income, including regular pay, being taxed at a higher rate. This is not entirely true.

Most states in the United States employ a marginal tax system, which means you’re only taxed at a higher rate on the portion of your income that falls into a higher bracket.

Here’s a simple example to illustrate:

If your regular pay – say, $10,000 – is taxed at 10%, that means you’ll pay $1,000 in taxes. But if your overtime hours push your gross income to $12,000, for the part of your income above the threshold, you’d be taxed at the next bracket – which could be, for the sake of argument, 12% – but the first $10,000 is still taxed at 10%. This is an important aspect to keep in mind when considering the tax implications of overtime earnings.

Is it worth it to still work overtime?

Absolutely, and here’s why. Regardless of which tax bracket you fall into, the more money you earn, the more you’ll take home.

And since overtime income equates to a bigger paycheck, even after accounting for a potentially higher tax bracket, the overall take-home amount is almost certainly more than what you’d have earned without the extra hours.

For instance, if without overtime, you're in the 12% income tax bracket, every added dollar from overtime is still taxed at just 12%. You're still keeping 88% of that money in this scenario, which is more than the zero percent you'd keep if you don't work overtime.

Are there exemptions to this rule?

As with any tax-related issue, there are always exceptions and exemptions. For example, some states have a flat income tax rate, meaning that all earners within the state are taxed at the same percentage regardless of their income level. In cases like these, earning overtime may indeed result in a larger chunk of your take-home pay being taxed at a higher rate.

Some occupations also do not earn overtime pay, such as salaried positions (not paid by the hour), administrative jobs, jobs that pay a commission, and more. These exemptions depend on the state that you live in.

Woman holding a tiny clock while her laptop screen displays the word tax

Consult with a professional

Dealing with the tax code can get a bit overwhelming, especially with income that varies, such as overtime pay.

The key is to stay on top of your earnings, keep track of the hours you work, and understand how they affect not only your paychecks but also your end-of-year finances. Your payroll department can be a great resource for understanding how your overtime is calculated and the implications it has for your tax withholdings.

Taxes are complex, and the laws around them are always changing. If you need help with your tax situation, it may be worthwhile to seek the help of a tax professional. They can provide personalized advice and help you maximize your earnings and minimize your tax liability.