Overtime is taxed the same way as regular wages, but you pay tax on a larger total income

Yes, overtime is taxed. The IRS treats overtime pay as ordinary income, which means it is subject to federal income tax, Social Security tax, and Medicare tax at the same rates as your regular pay. The difference is that when you earn overtime, your total taxable income for the year goes up, so you may end up in a higher tax bracket or owe more in total taxes.

Your employer withholds taxes from your overtime paycheck using the same method they use for regular pay. If you work overtime in a pay period, that paycheck will be larger, and the withholding will be larger too. This is not a special tax on overtime—it is straightforward tax on more money.

The amount withheld depends on what you told your employer on your W-4 form when you were hired. If you did not account for overtime when you filled it out, you may find that not enough tax is being withheld, which could mean you owe money when you file your return in April.

Key Takeaways

  • Overtime pay is taxed as regular income at federal, state, and local rates—there is no separate overtime tax.
  • Your employer withholds taxes from overtime the same way they do from regular pay, based on your W-4 form.
  • If you earn significant overtime, you may need to adjust your W-4 to avoid underpaying taxes during the year.
  • Overtime is counted as income for the year, which can push you into a higher tax bracket if your total earnings cross a threshold.
  • Self-employed people and gig workers do not have taxes withheld and must set aside money for taxes themselves.

How withholding works when you earn overtime

When you earn overtime, your employer calculates your paycheck and withholds federal income tax, Social Security tax (6.2 percent of gross pay), and Medicare tax (1.45 percent of gross pay). The federal income tax withheld is based on the W-4 form you completed, which tells your employer how many allowances to claim and whether you have other income or jobs.

If you did not tell your employer that you would be earning overtime, the W-4 may not be set up correctly. For example, if you claimed an allowance for a second job that you no longer have, your employer may be withholding less than you actually owe. The reverse can also happen: if you claimed fewer allowances to be safe, you may have too much withheld and get a refund.

You can adjust your withholding at any time by submitting a new W-4 to your employer's payroll department. The IRS has a withholding calculator on its website (irs.gov) that can help you figure out whether your current withholding is close to what you will owe.

Tax brackets and how overtime affects them

The United States uses a progressive tax system, which means the tax rate increases as your income increases. You do not jump into a higher rate on all your income—only the income above each threshold is taxed at the higher rate. However, overtime can push you into a higher bracket, which means the overtime itself is taxed at a higher rate than your regular pay.

For example, if you are single and earn $40,000 in regular pay, you are in the 12 percent federal tax bracket for 2024. If you earn $8,000 in overtime, your total income is $48,000. The first $11,600 of that $8,000 stays in the 12 percent bracket, but the remaining $6,400 moves into the 22 percent bracket. This means some of your overtime is taxed at 22 percent instead of 12 percent.

Tax brackets change each year, and they vary depending on whether you file as single, married filing jointly, head of household, or another status. Your employer's withholding is an estimate based on the information on your W-4, so it may not be exact. This is why many people owe money or get a refund when they file their tax return.

State and local taxes on overtime

In addition to federal tax, most states have their own income tax, and some cities do as well. Overtime is subject to state and local income tax at the same rates as regular pay. Your employer withholds these taxes from your paycheck along with federal tax.

A few states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—do not have a state income tax. If you live in one of these states, you only owe federal tax on your overtime. If you live in a state with income tax, the rate varies by state and by income level, just like the federal system.

Some cities, including New York City, Philadelphia, and Columbus, Ohio, charge a local income tax as well. If you work in one of these cities, your employer will withhold local tax from your paycheck. The combined federal, state, and local tax on overtime can be significant, which is why it is important to understand what you will actually take home.

What happens if too little tax is withheld from overtime

If you earn overtime but your W-4 is not set up to account for it, you may have too little tax withheld throughout the year. When you file your tax return in April, you could owe money to the IRS. If you owe more than $1,000, you may also owe a penalty for underpayment, though the IRS waives this penalty in some situations.

The best way to avoid this is to adjust your W-4 as soon as you know you will be earning overtime regularly. You can ask your payroll department to withhold an extra amount each paycheck, or you can adjust your allowances using the IRS withholding calculator. Even a small adjustment—such as claiming one fewer allowance—can make a big difference over the course of a year.

If you have already underpaid and owe money when you file, you can pay it in full or set up a payment plan with the IRS. The IRS charges interest on unpaid taxes, so paying as soon as possible is the cheapest option.

Self-employed and gig workers: no withholding, but you still owe tax

If you are self-employed or work as a gig worker (such as a rideshare driver or freelancer), no one withholds taxes from your pay. You are responsible for setting aside money to pay federal income tax, Social Security tax, and Medicare tax yourself. This is called estimated tax, and you pay it in four installments throughout the year.

Self-employed people owe both the employee and employer share of Social Security and Medicare tax, which is 15.3 percent combined (compared to 7.65 percent for employees). This is a significant expense, and many self-employed people underestimate how much they need to set aside.

If you are self-employed, you should work with a tax professional or use tax software designed for self-employed people to calculate your estimated tax payments. Underpaying can result in penalties and interest, just as it does for employees.

Bonuses and how they are taxed differently from overtime

Bonuses are sometimes taxed differently from overtime, depending on how your employer handles them. Some employers withhold a flat 22 percent federal tax on bonuses (or 37 percent on bonuses over $1 million), while others use the same withholding method as regular pay. Neither method is required by law—your employer chooses.

The flat withholding method often results in either too much or too little tax being withheld, which is why you may owe money or get a refund when you file your return. The important thing to understand is that a bonus is still income, and you will owe tax on it no matter how much is withheld.

Overtime is not usually treated as a bonus—it is treated as regular pay. However, if your employer calls a lump sum payment a "bonus" instead of overtime, the withholding may be different. If you are unsure how your employer is handling a payment, ask your payroll department.

Frequently Asked Questions

Do I pay more tax on overtime than on regular pay?

Not directly. Overtime is taxed at the same rate as regular pay. However, because overtime increases your total income, it may push you into a higher tax bracket, which means some of your overtime is taxed at a higher rate than your regular pay. The effective tax rate on the overtime itself is higher, but the tax rate on each dollar is the same.

Can I claim overtime as a deduction on my taxes?

No. Overtime is income, not a deduction. You cannot reduce your taxable income by claiming the hours you worked. However, if you are self-employed and incurred expenses to earn that overtime (such as equipment or supplies), you can deduct those expenses.

What if my employer does not withhold enough tax from my overtime?

Adjust your W-4 to increase withholding. You can ask your payroll department to withhold an extra amount each paycheck, or you can claim fewer allowances on a new W-4. If you have already underpaid for the year, you will owe money when you file your return, but you can pay it in full or set up a payment plan with the IRS.

Is overtime taxed differently if I work for a nonprofit or government employer?

Federal income tax and Medicare tax work the same way. However, some government employees and nonprofit employees do not pay Social Security tax. If you work for a government agency or nonprofit, ask your payroll department which taxes you pay on overtime.

Do I have to pay taxes on overtime if I am paid under the table?

Yes. All income, including cash payments and under-the-table work, is taxable. The IRS expects you to report it on your tax return. Failing to report income is tax evasion, which can result in penalties, interest, and criminal charges. If you are paid under the table, you should report the income and pay the taxes owed.