Working overtime can mean extra money to reach your financial goals, support your family, and enjoy leisure time. But just like your regular wages, you must pay taxes on your overtime pay.
Learn about the taxes you may have to pay on your overtime wages to answer the questions, is overtime taxed more, and how much overtime you need to work to make the extra hours worth your time.
Does Overtime Work Get Taxed More?
Short answer, no. The rate you are taxed remains the same whether you work standard or overtime hours.
The confusion arises when the income you earn working overtime pushes you into a higher tax bracket. The IRS uses your gross income, the total income you make before deductions and taxes, to determine your tax bracket. The higher your tax bracket the higher your income, and the more taxes you will pay. In other words, the rate you are taxed increases as your income increases.
For the 2022 tax year, there are seven tax brackets for ordinary income. These brackets apply to the taxes you’ll file in April 2023.
For example, if, as a single taxpayer, you make $80,000 in 2022, you will be taxed at a rate of 22%. If you work overtime and end up with a gross income of $90,000, you move up a tax bracket and are taxed at a higher rate of 24%.
Is Overtime Taxed Differently?
Your overtime wages are taxed at the same rate as your regular wage bracket (10% for the lowest income and 37% for the highest income), no matter how many hours each week you work. Employers must withhold taxes from the paychecks of salaried employees as determined by the IRS tax tables.
For example, if you fall into the 24% tax bracket and work overtime for $100, your employer must withhold $24 (.24 x $100 = $24) because of federal income taxes.
While withholding tax is calculated the same way for overtime and regular pay, the additional income could increase your gross revenue and push you into a higher wage bracket.
For example, you may earn an annual salary of $88,725 within the 22% tax bracket. Working hours of overtime could raise your estimated yearly salary past $89,075, meaning your paycheck would be taxed at 24%.
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How Overtime is Calculated
The Fair Labor Standard Act (FLSA) mandates that, unless exempt, employees receive overtime pay for any hours they work in a week after 40 hours. The overtime rate they receive cannot be less than 1.5x their regular pay rate (time and a half).
If an hourly employee works more than 40 hours in a work week, they must receive at least time and a half payment for each additional hour.
You can calculate your overtime rate by multiplying your regular wage by 1.5 and then multiplying the result by the number of hours you worked overtime.
Overtime pay = (1.5) x (# overtime hours)
Under FLSA, employees must receive overtime wages after working over 40 hours a week, regardless of how you split that time up across the week. Some states also have daily overtime laws, which allow employees to receive overtime for working many hours in a single day.
If you live in Alaska, Nevada, Puerto Rico, or the District of Columbia, you get paid at an overtime rate after working 8 hours in a single day. If you live in Arkansas or Colorado, you receive overtime after 12 hours of daily work, and California offers overtime rates after 15 hours of daily work.
If you are salaried, you are not automatically exempt from overtime wages. For example, if you receive a salary of less than $684 per week, you are non-exempt, and your employer must pay you overtime.
How to calculate your overtime correctly
Calculating overtime will look different for hourly and salaried employees.
Hourly employees are protected under FSLA and must receive at least 1.5x their regular hourly wages for overtime. To calculate an hourly employee’s overtime for a given week, multiply the number of overtime hours worked by the overtime pay rate.
For example, if you make $20 an hour and worked 50 hours last week, you worked 10 overtime hours (50-40=10) at $30 per hour ($20 x 1.5).
10 hours x $30 per hour = $300 overtime
If a salaried employee is nonexempt based on FLSA criteria, they must receive overtime wages.
To calculate the overtime of a nonexempt salaried employee, let’s look at an example of an employee that makes $500 a week and works 50 hours (10 overtime hours).
- Calculate the regular hourly rate by dividing the weekly salary by the hours you expect the employee to work ($500/40 = $12.5).
- Calculate the overtime hourly rate, typically time and a half, by multiplying the regular hourly rate by 1.5 ($12.5 x 1.5 = $18.75)
- Calculate overtime wages by multiplying the overtime hourly rate by the number of overtime hours, in this case, 10 ($18.75 x 10 = $187.50)
The employee made $187.50 total in overtime.
Overtime pyramiding
Pyramiding of overtime is when an employee receives overtime for working more than 40 hours in one week and working more than a certain number of hours set by each state in a single day. When pyramiding occurs, an employee is essentially paid twice for a single hour of overtime.
While relatively uncommon, if an employee consistently receives a double overtime payout, it could lead to financial losses and set a bad precedent for your company.
To avoid pyramiding, some states calculate daily and weekly overtime independently. This means you cannot count daily overtime toward your 40-hour work week. Weekly overtime only applies to overtime that was not accrued through daily overtime.
For example, an employee in California works 10 hours a day for 5 days, totaling 50 hours in a week. The employee was then paid for his daily overtime at 2 hours a day, or 10 hours across the week. Since their 10 hours of overtime were paid for through daily overtime, they cannot also claim 10 hours of weekly overtime. Doing so would give them an additional 10 hours of overtime pay resulting in 20 total hours, pyramiding the hours.
How is Overtime Taxed?
Federal income taxes are calculated based on your gross income, which determines your tax bracket. The amount you will pay in overtime taxes depends on this tax bracket. The brackets are segments of income that are taxed at different rates.
Use the 2022 federal income tax brackets to determine where you fall for taxes due in April 2023. For single filers, the rates are as follows:
- 10% for income under $10,275
- 12% for income over $10,775
- 22% for income over $41,775
- 24% for income over $89,075
- 32% for income over $170,050
- 35% for income over $215,950
- 37% for income over $539,900
Most states require a separate income tax, for which the tax brackets vary by state.
How to calculate your overtime tax
To calculate your overtime tax, you must determine what tax bracket you fall into and how many overtime hours you worked. To determine your overtime tax, multiply your overtime earnings by the income tax you pay for your tax bracket.
If your federal tax withholding is in the 24% tax bracket and you make $100 in overtime pay, your employer will withhold $24 (.24 x $100) from your paycheck.
As with regular wages, your overtime pay rate is subject to Social Security, Medicare, and state and local taxes, depending on where you live.
Overtime pay and the tax bracket myth explained
Many employees incorrectly believe that when their overtime earnings push them into a higher tax bracket, they take home less money than they would have if they just worked their regular hours. This is a myth. Tax deductions are based on your estimated annual salary for that pay period.
Working overtime can potentially raise your income enough to push you into a higher wage bracket, but you will only be taxed at a higher rate for that pay period. If you don’t work overtime during your next pay period, you will be taxed within the normal rates for your expected income bracket.
Is My Tax Withholding More for Overtime Pay?
Tax withholdings for overtime pay are calculated the same way as regular pay. Earning $100 in overtime and being in the 32% tax bracket will require your employer to withhold $32 from your weekly paycheck.
However, if the money you make working overtime pushes you into a higher tax bracket, you will be taxed at a higher rate. In this case, it isn’t your overtime that is taxed more; it’s your entire gross income (your total income before taxes and deductions).
If you make $30,000 a year without overtime, your tax rate is 12%. If you work overtime and end up with a gross income of $45,000, you will be nudged into the next tax bracket, and your federal tax withholding tax rate will be 22%.
As well as federal income tax, you may also have to pay state taxes on your overtime earnings. If you owe state taxes, your employer will use the information from the state version of Form W-4 and your income to determine how much to withhold.
Your employer may also withhold local taxes if your city or community has an income tax. These rules and rates vary based on location.
How Many Hours of Overtime Can I Work Before I Get Taxed More?
Your payroll taxes are calculated based on your estimated annual income, so how much overtime you work before you enter the next tax bracket depends on your regular wages and household income.
If you make $18 an hour and work 40 hours a week, your annual income would be $37,440 (18×40=720, 720×52=37,440). $37,440 would place you in the 12% tax bracket. The 22% tax bracket begins at $41,775.
If you decided to work 14 hours of overtime each month, you would earn an additional $378 a month, resulting in an annual income of $41,976 (18×1.5=27, 27×14=378, 378×12=4,536, 4,536+37,440=41,976). Raising your income to $41,976 will place you in a higher tax bracket, the 22% tax bracket.
Therefore, in this example, you can only work 13 hours of overtime per month before increasing your payroll taxes because your total income would be $41,652.
Is Overtime Worth it After Taxes?
Yes, working overtime is worth it. Earning a higher rate of pay for overtime doesn’t necessarily mean a higher tax bracket; it means your taxable income will be higher for that tax year.
For non-exempt employees, working extra time means earning extra money, no matter how much you’re taxed. Working more hours means a bigger paycheck, and a bigger paycheck means more taxes.
But just because you pay more taxes, it doesn’t mean the extra hours aren’t worth it. You’ll want to crunch the numbers to determine how many additional hours you can work before it becomes less worth the effort.
If you make $20 per hour and work 40 hours a week for a yearly salary of $41,600, you fall into the 12% federal income tax bracket for 2022.
On a typical week, you make $800 ($20 x 40 hours) before taxes. Without any overtime, you pay $96 ($800 x .12) in federal income taxes and take home $704 before other deductions.
If you work 5 hours of overtime one week at a rate of 1.5x your normal wage, you make an extra $150 ($30 x 5) before taxes, for a total of $950. This higher sum pushes you into the next highest tax bracket, and you will have to pay 22% federal income tax. ($950 x .22) = you pay $209 in federal income taxes and take home $741. In this case, you only made $37 ($741-$704) working overtime.
If you work 20 hours of overtime one week, you make an extra $600 ($30 x 20) before taxes, for a total of $1,400. Though you worked more overtime hours, it wasn’t enough to push you further than the 22% tax bracket. ($1,400 x .22) = you pay $308 in federal income taxes and take home $1,092.
You can use this calculation to determine the exact number of overtime hours you need to work to meet your financial goals. If working overtime pushes you into a higher tax bracket, you will have to determine the amount of overtime that is worth it in your unique situation.
How much overtime should I work?
There isn’t a right amount of overtime to work, as it depends on your wages, goals, and work-life balance. If you’re hoping to pay off debt, invest in your retirement or emergency funds, or save money for a significant expense, working overtime can help you put more money toward those goals.
Despite this, too much overtime can disrupt your work-life balance, making it difficult to maintain relationships or hobbies and possibly harming your physical and mental health. No matter how much overtime you choose to work, ensure that it’s not coming at the expense of your health and daily life.
It can be challenging and frustrating to attempt these calculations without the help of a tax professional. Tax Shark offers tax preparation and planning for individuals and businesses of all sizes. Since 2016, Tax Shark has helped its clients generate over $4 million in tax savings by finding them every available credit and deduction. Contact Tax Shark for a second opinion tax review and get the most from your tax return.
FAQs
Here are the answers to some common questions about how overtime is taxed.
Yes. Just like your regular pay, any overtime pay you earn is subject to all federal and state income taxes.
Overtime pay is taxed at the same rate as your regular pay. Your tax rates are determined by which tax bracket you’re in, which is determined by your gross income.
There is no federal overtime tax rate. Taxes for your overtime pay are calculated by your income tax bracket, not how much time you work.
No. You won’t make as much if your overtime pay pushes you into a higher tax bracket, but you will still make more than you would without overtime.
Yes. Under the FLSA, employees who A) work as executives, administrative, learned or creative professionals, computer employees, or outside salespeople, B) earn a rate of at least $684 per week, and C) are paid on a salary basis are ineligible for overtime pay.
It isn’t always bad. Working overtime can be beneficial if you need extra money, but it can come at the cost of work-life balance and lead to extra stress.
Legally, there is no limit on how much overtime you can work. Keep in mind that working overtime can lead to health issues and burnout.
