Is Overtime Taxed More?
Last Updated: July 20, 2022 • 7 min read
Author: Zach L.
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Overtime is the additional or extra work hours that push you past your regular duty hours. So, if you’re working 40 hours a week, that’s your standard work week. If you exceed the 40 hours mark, you’re working overtime.
Overtime hours are frequently billed at a higher rate than the regular rate of pay. Frequently the overtime rate is referred to as time and a half, but there isn't a hard and fast rule for the rate at which a non-exempt employee gets paid for overtime wages. There is no limit on the hours of overtime that is worked in a week legally, but the number of hours in a week makes an artificial ceiling regardless.
Here, the question arises is overtime taxed differently?
Let’s dive deep into the topic and find out the different ways you’re taxed or compensated and how overtime is taxed.
Overtime Pay Is Not Taxed More Than Your Other Wages
Overtime is considered an additional form of income, and it is subject to the same tax rates as other forms of income. In most cases, the employer will be required to withhold the appropriate amount from your gross income and remit that amount directly to the IRS for federal income tax, and to pay for your state taxes.
In some cases, however, the employer may choose not to withhold additional taxes because they feel that your overtime work adds no additional value to their business. This could include situations where you work on weekends or holidays or if you are only working a few hours per week more than your regular schedule.
Overtime payments for regular hours are subject to the same income tax rate as your other wages and this also includes commissions. The tax rate for overtime could be a higher income tax bracket, however, like any other income, paying taxes on overtime doesn’t necessarily mean you have to pay more in taxes. it all depends on what your taxable income totals for the tax year. Then that is divided into different tax brackets and you pay different percentages based on the differing amounts in each bracket.
For example, if you make $40,000 a year and work 40 hours a week at your regular hourly rate of $20 per hour, your weekly take-home pay would be $800 before taxes. If you earned $200 in overtime pay, the total take-home pay would increase from $800 to a total amount of $1,000 per week — not enough to put you into the next tax bracket or increase your overall tax bill significantly.
Overtime Pay Is Taxed As Regular Income
The amount of your wage subject to payroll taxes depends on your income level and tax bracket. Generally, you pay more in payroll taxes if you’re in a higher tax bracket. If your gross pay is $45,000 per year and is in the 25% tax bracket, your employer will take 25% of your earnings to send them to the IRS to pay for medicare taxes, federal taxes, social security taxes, etc. That doesn't change your total income but does affect your regular paycheck as it will be less after all the income taxes.
How Different Tax Brackets Work
If your income is low, you’ll be in a lower tax bracket, like 15%. If you earn more, your tax bracket might be higher such as 25%.
So, here’s the math. If you earn $100 in the 15% tax bracket, the employer will take $15 for taxes. But if you’re in the 25% tax bracket, if you earn $100, $25 will be withheld for federal tax.
Tax brackets are much more complex than the simple math provided above. If you file your taxes as a single person you have different tax brackets than if you file as married filing jointly. There are also head of household filers as well as married couples filing separately. Each of these has its own tax brackets and how much tax you pay in each bracket. Make sure to consult with your tax professional on how to file to save you the most on taxes.
Due to the higher tax bracket from additional income, you’ll pay a higher tax percentage on your regular wage and overtime earnings.
This is because the tax brackets are based on your income. So, if you earn more money, you will be in a higher tax bracket and pay a higher tax rate. This does not mean you shouldn't try to earn more money. Because only the extra money at the very top in the new bracket that is above your ordinary income will be taxed in the higher bracket.
Therefore, your overtime matters less and the tax bracket more.
Do Bonuses Incur Taxes?
What Is a Bonus?
A bonus is an extra payment made to an employee by their employer. It can be in addition to their regular wages (which would make up their standard compensation) or instead of them (which would make up non-regular compensation).
Some companies give bonuses on top of their regular salaries as extra compensation for excellent performance. In contrast, others may do so as part of a merit-based pay system where employees are rewarded based on meeting specific goals. A bonus payment is a great way for salaried employees or hourly employees to be incentivized to go the extra mile and put in that extra time.
Are Bonuses Taxable?
Yes, bonuses are taxable because they’re supplemental wages. The IRS defines supplemental income as “that which supplements the regular compensation received by an employee.”
In other words, bonuses are not just a portion of your salary; they’re an extra incentive to work harder and get more done. For example, if you are paid $100,000 yearly and receive an annual bonus of $5,000, it’s still taxable. However, most bonus structures are taxed differently. They incur a flat 22% federal withholding rate. This can be great for some or can be high compared to how much they are paying in their normal tax bracket.
Final Thoughts
Overtime pay is a big deal for many people, primarily if you work in a blue-collar job that doesn't pay on a salary basis. The average American works roughly 41 hours weekly which isn't much overtime, but many employees work longer. If you continue to work the extra hours at an hourly gig, you’ll get the extra income and can use it preferably for investments. Many factors determine how much extra money you get for working overtime.
However, one of the most critical concerns among employees is how they are taxed for overtime. The simple answer is overtime isn’t taxed differently. It’s taxed the same way as other wages. But it might take you to a different or higher tax bracket, so your marginal tax rate will increase. When it is tax time make sure to talk to your tax professional to help you pay your taxes correctly on your increased income from all the overtime that you have been working.
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