If you can work overtime, you might wonder, ‘Is overtime taxed more?’ The answer might affect whether you accept overtime work for higher pay. Overtime taxed differently is a common myth, but we’re here to set the record straight.
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Is Overtime Taxed More: The Facts
The short answer is ‘no.’ That’s the good news!
You pay the same federal income tax withholdings, including FICA taxes on overtime earnings, as regular wages. However, there’s a ‘but’ in the scenario. Overtime pay, like any ordinary income, can increase your taxable income. A higher income can push you into a higher tax bracket, leading to higher taxes.
So it may feel like overtime tax laws allow more taxation on overtime wages, but in reality, your gross pay is higher, and you have reached a different tax bracket.
Overtime Tax and Pay vs. Regular Tax and Pay
Before discussing how regular and overtime wages are taxed, let’s look at the difference between the two types of pay.
Regular wages are wages paid for the standard 40-hour work week. For example, if you make $17 an hour and work 40 hours a week, you’d earn $17 x 40 = $680 before taxes or $35,360 annually. If you didn’t work overtime, you’d be in the 12% tax bracket, paying 10% on the first $11,000 and 12% on the remaining $24,360.
As the Fair Labor Standards Act requires, overtime is your regular wages multiplied by 1.5. Therefore, any overtime worked over the 40-hour workweek must be paid at the 1.5 times rate.
Using our $17-an-hour example, if you work 50 hours a week, the first 40 hours are paid at your regular hourly rate, and the additional 10 hours of overtime earn time and a half. So, in addition to the $680 a week, you’d earn $25.50 (overtime pay) x 10 = $255, for total earnings of $935 weekly or $48,620 annually.
With overtime pay, your income increases into the 22% income bracket. You’d pay 22% on any amount over $44,725 or $3,895 of your income.
Does Overtime Get Taxed More Than Regular Pay?
Looking at our example above, it seems like overtime gets taxed at a higher tax bracket, right?
It’s not the fact that the income is overtime earnings. Instead, your total taxable income is higher because of the overtime pay. As a result, you’d enter a higher tax bracket than your regular wage bracket, whether the income was overtime, commission, or bonus pay. This is because the IRS combines all taxable income to determine your tax bracket on your tax return.
Calculating Overtime Tax
Calculating overtime tax may seem complicated, but it only depends on your income’s tax bracket.
You can’t determine how much your overtime gets taxed; instead, you can determine what the overtime earnings will do to your income tax brackets.
For example, the first tax bracket is 10% for income less than $11,000. So, the first $11,000 you make yearly is taxed at 10%. From there, the tax brackets increase based on the income you receive each year.
How Is Overtime Taxed in Different Tax Brackets
The IRS tax tables for federal income taxes are as follows:
Income less than $11,000 – 10%
Income over $11,000 but less than $44,275 – 12% (plus the $1,100 on the first $11,000)
Income over $44,725 but less than $95,375 – 22% (plus the $5,147 on the first $44,725)
Income over $95,375 but less than $182,100 – 24% (plus the $16,290 on the first $95,735)
Income over $182,100 but less than $231,250 – 32% (plus the $37,104 on the first $182,100)
Income over $231,250 but less than $578,125 – 35% (plus the $52,832 on the first $231,250)
Income over $578,125 – 37% (plus the $174,238.25 on the first $578,125)
As you can see, if your overtime pay doesn’t increase your income over the threshold you’re already in with your regular wages, it isn’t taxed differently. However, if your annual income with standard wages is on the border of the threshold, overtime wages could push you into the next tax bracket. If you aren’t pushed into the next bracket, you pay the same rate as your regular earnings.
The Overtime Tax Rate
You don’t have to worry about an overtime tax rate if asked to work overtime. However, if you’re concerned about your tax bracket increasing, do the math to determine if the overtime earnings will push you into the next tax bracket and if it’s worth working the overtime hours.
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Why Overtime Tax Is Different
Overtime tax isn’t different by definition. In other words, there isn’t a specific overtime tax. The higher income, however, increases your tax bracket, which means you’ll pay more federal income taxes on the higher pay.
Looking at the tax brackets above, you’ll see that only the excess above each threshold is subject to the higher tax bracket. So, for example, if you’re in the 12% bracket with your annual income, but your overtime pay puts your gross income over the $44,275 threshold, any income over that amount would be taxed at 24%. So, for example, if your overtime puts you at $50,000, you’d pay an additional $1,374.
Pyramiding of Overtime Taxes
Some state laws require employers to pay overtime when employees work more than 8 hours a day, even if the hours don’t total more than 40 per week.
If the employee works longer than 8-hour days and over 40 hours a week, they could essentially pyramid their overtime hours, getting double the overtime wages. The higher pay would result in a much higher tax liability.
Many states have laws that prevent pyramiding, so employees don’t get overtime earnings twice for the same hours.
Is Working Overtime Worth It After Tax Withholdings?
Everyone has to decide if working overtime is right for them. Not only must you work extra hours, but you’ll increase your tax liability.
If the higher tax bracket costs you too much in taxes and decreases your take-home pay, you might need to find the ‘sweet spot’ for working overtime without going into the next bracket. Typically, the higher you are on the tax bracket system, the less valuable overtime earnings become.
The Progressive Tax System
Our progressive tax system increases the tax rates as your income increases. It’s because higher-income earners can afford higher tax rates than people who earn less. The system is meant to make taxation fair for everyone.
If we had a flat tax rate system, everyone would pay the same tax rate, which wouldn’t be fair to lower-income earners. Instead, a progressive tax system evens the playing field to make it easier for everyone.
Pros and Cons of Overtime Tax
Overtime tax doesn’t necessarily exist, but the progressive tax system does. Understanding the pros and cons of the system can help you understand it better.
Charges a lower tax rate to lower income earners – This ensures people who make less money have enough take-home pay to cover their expenses. The more money people make, the higher the tax liability they can afford.
Progressive tax helps stimulate the economy – With lower-income earners keeping more of their paycheck; they help stimulate the economy by purchasing needs and increasing demand.
It helps the government – The higher tax brackets for higher-income earners enable the government to earn more than they’d make with a flat tax rate.
Higher tax brackets may discourage overtime earnings: People in higher tax brackets may not work overtime because the higher tax bracket may reduce or eliminate the benefit of working overtime.
Higher-income earners may feel that it’s not fair to pay more taxes: Higher taxes may encourage people in those tax brackets to find ways to underpay rather than pay taxes.
Money may not stay in our country: Many high-income earners find ways to invest their money outside the United States to keep their tax brackets lower.
You might wonder why is overtime taxed so much or how much does overtime get taxed. We answer these questions and more below.
Are There Exemptions for Overtime Taxes?
There are a few situations where overtime rules don’t apply. For example, you may be exempt if you make twice the stated minimum wage. This applies to professional employees, administrative personnel, and executives. It also applies to salaried employees as they don’t receive hourly employee pay.
Is Time and a Half the Same as Overtime, and Is It Taxed Differently?
Overtime pay can be time and a half or double pay. It depends on the industry, the laws, and your employer. No overtime is taxed differently, however. It all depends on your total taxable income and your income tax bracket with all income combined.
Is Time and a Half the Same as Double Pay?
Time and a half and double pay are different. They are both methods of overtime pay, but they have different rates. The overtime pay rate you receive depends on the laws and your employer, but if you earn 1.5 times your pay, you multiply your hourly wage by 1.5, and if you earn double pay, you multiply your hourly wage by 2.
How Many Hours of Overtime Can I Work Before They Tax Me More on My Pay?
How many hours of overtime you work before getting taxed at a higher wage bracket depends on your earnings. If you’re at the lower or middle end of your tax bracket, you can likely work many hours before your income tax bracket changes. However, even a few overtime hours may bump you to the next bracket if you’re at the higher end of your current bracket.
Is It Normal for Withholdings to Not Be Removed From My Pay Check?
In general, employers must withhold payroll taxes from your paycheck whether you are paid an annual salary or hourly wage. If your employer doesn’t withhold federal income tax and state income taxes, you must pay them.
Are All Employees Able to Receive Overtime Pay?
Some employees are ineligible for overtime pay, including those paid a salary and professionals making twice the minimum wage.
Are There Consequences to Not Paying Overtime Tax?
Both you and your employer could be held liable for the unpaid payroll taxes plus penalties and fees for not paying taxes on time. So if your employer doesn’t withhold taxes on overtime income, make sure you pay the taxes yourself.
Are My Employer Benefits Taxed?
Your fringe benefits will be included in your taxable income, and you must pay taxes on the earnings.
Will I Need to Declare My Overtime for Tax Credits?
To maximize your tax credits, always include your overtime pay. Your tax credits are dependent on your total taxable income.
Final Thoughts: Is Overtime Taxed More
So, is overtime taxed more? Fortunately, the answer is no! Phew!
But, overtime tax laws can push you into a higher tax bracket, which means you may owe more taxes. Your overtime pay is part of your ordinary income and increases the taxes you owe, but strictly working overtime to make extra money won’t create an excessive tax burden.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.