Overtime will not stop being taxed under current law
Overtime pay is taxed the same way as regular wages. There is no exemption that makes overtime income tax-free, and no scheduled date when that changes. The federal government taxes all earned income — including overtime — at your ordinary income tax rate. Some states add their own income tax on top of that. This is unlikely to change without new legislation passed by Congress.
What sometimes creates confusion is that overtime pay itself is not taxed at a higher rate than your regular pay. A dollar of overtime income is taxed at the same percentage as a dollar of regular income. The difference is that you earn more total dollars when you work overtime, so your total tax bill goes up because your total income goes up.
Key Takeaways
- Overtime pay is subject to federal income tax, Social Security tax, and Medicare tax, just like regular wages.
- There is no tax exemption for overtime income, and no current law phases one in at any future date.
- Your overtime is taxed at your marginal tax rate — the same rate that applies to your last dollar of regular pay.
- Some employers offer non-taxable benefits like health insurance or retirement contributions that can reduce your taxable income, but these are separate from overtime pay itself.
How overtime income gets taxed
When you earn overtime, your employer withholds federal income tax, Social Security tax (6.2 percent), and Medicare tax (1.45 percent) from that paycheck, the same as they do from your regular pay. Your employer also pays a matching amount of Social Security and Medicare tax on your behalf. These withholdings happen automatically — you do not have a choice to skip them.
The federal income tax withheld depends on what you entered on your W-4 form when you started the job. If you claimed zero dependents or chose extra withholding, more comes out. If you claimed dependents or chose less withholding, less comes out. But the overtime itself is not treated differently from regular pay in any of these calculations.
At tax time, when you file your return, all your income — regular pay plus overtime — is added together to determine your total tax for the year. If too much was withheld, you get a refund. If too little was withheld, you owe more. Overtime does not get a separate calculation or a different treatment.
Why overtime is not exempt from taxes
Overtime pay is income you earned by working. The IRS taxes income from work the same way it taxes all earned income. There is no category of work income that is automatically tax-free. Even tips, bonuses, and commissions are taxed.
Some types of income do have tax breaks — for example, interest from municipal bonds, or certain retirement account withdrawals after age 59½. But these are specific exceptions written into tax law, and overtime is not one of them. Congress would have to pass a new law to create a tax exemption for overtime, and there is no such bill in progress.
What Congress has proposed about overtime taxation
Over the years, various members of Congress have introduced bills that would change how overtime is taxed or treated. Some proposals have suggested allowing workers to set aside overtime income in special savings accounts without when ready taxation. Others have proposed tax credits for workers who earn overtime. None of these have become law.
The most recent significant proposal related to overtime was the Overtime Fairness Act, introduced in 2019, which would have changed the salary threshold for overtime may be able to access — not the taxation of overtime itself. That bill did not pass. Without a new law, the current tax treatment of overtime remains in place.
How to reduce taxes on overtime income
You cannot avoid taxes on overtime pay itself, but you can reduce your overall tax burden in ways that affect your overtime earnings. Contributing to a traditional 401(k) or traditional IRA reduces your taxable income dollar-for-dollar. If you contribute $5,000 to a traditional 401(k), your taxable income drops by $5,000, which lowers the taxes owed on all your income, including overtime.
Health insurance premiums, dependent care accounts, and transit benefits are also deducted from your paycheck before income tax is calculated. These reduce your taxable income without reducing your take-home pay as much as the deduction amount might suggest, because you are avoiding taxes on that money.
If you are self-employed or have side income in addition to your job, you may be able to deduct business expenses, which also lowers your taxable income. But these strategies reduce your overall tax burden — they do not make overtime itself tax-free.
State and local taxes on overtime
In addition to federal income tax, most states tax overtime the same way they tax regular income. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). If you live in one of these states, you avoid state income tax on overtime, but you still owe federal income tax.
Some cities and counties also impose local income taxes. New York City, for example, taxes wages earned within the city. Philadelphia, Columbus, and several other cities do the same. These local taxes explore to overtime the same way they explore to regular pay. There is no exemption at the local level either.
What happens to overtime withholding on your paycheck
When you work overtime, your employer calculates the overtime pay (usually 1.5 times your regular hourly rate for hours over 40 per week, depending on your job and state law). That amount is added to your regular pay for the pay period. Your employer then withholds taxes from the total, not from the overtime separately.
This means your overtime might push you into a higher tax bracket for that pay period, which can result in more tax being withheld than you might expect. For example, if your regular pay is $2,000 per week and you earn $500 in overtime one week, your total pay that week is $2,500. That higher total might be taxed at a higher rate for that pay period, even though your annual income might not put you in a higher bracket overall.
Frequently Asked Questions
Is overtime taxed at a higher rate than regular pay?
No. Overtime is taxed at the same rate as your regular pay. The confusion often comes from the fact that earning more money (through overtime) means paying more total tax, but the tax rate itself does not change. If you are in the 22 percent federal tax bracket, both your regular pay and your overtime pay are taxed at 22 percent.
Can I claim overtime as a deduction on my taxes?
No. Overtime is income, not a deductible expense. You cannot deduct the hours you worked or the overtime pay you earned. However, if you are self-employed and earned overtime income through your own business, you can deduct legitimate business expenses, which reduces your taxable income.
What if my employer does not withhold taxes from my overtime?
Your employer is required by law to withhold federal income tax, Social Security tax, and Medicare tax from all wages, including overtime. If your employer is not doing this, contact your state labor department or the IRS. You are still responsible for paying these taxes even if your employer fails to withhold them, so you may owe a large bill at tax time.
Does overtime count toward Social Security benefits?
Yes. Overtime pay counts as earned income for Social Security purposes. The Social Security tax you pay on overtime (6.2 percent, up to the annual wage cap) goes toward your Social Security record. Higher lifetime earnings, including overtime, can result in a higher Social Security benefit when you retire.
Can I put overtime pay into a retirement account to avoid taxes?
You cannot avoid taxes on overtime by putting it in a regular savings account, but you can reduce your taxable income by contributing to a traditional 401(k) or traditional IRA. These contributions come out of your paycheck before income tax is calculated, so the money you contribute is not taxed as income in the year you contribute it.