Is Overtime Taxed Higher? What Actually Happens to That Paycheck
You work a heavy week, the overtime lands, and the cheque looks smaller than you expected. The conclusion is almost universal: overtime must be taxed at a higher rate.
It is not. Overtime is ordinary wage income, taxed at exactly the same rates as your regular hours. What changes is withholding — and withholding is an estimate, not the tax itself.
Why the cheque looks over-taxed
Most payroll systems calculate withholding by annualising the current pay period. Earn $1,000 in a normal week and the system assumes you will earn $52,000 this year, and withholds accordingly.
Work fifteen hours of overtime and that week's gross jumps to $1,563. The system now assumes you will earn $81,250 for the whole year — a much higher income, sitting in higher brackets — and withholds at that elevated rate.
You did not actually earn that annualised figure. The over-withholding comes back to you as a refund, or reduces what you owe at filing. The tax rate never changed; the payroll system's forecast did.
What overtime is really worth
At $25 an hour in a state with no income tax:
| Overtime | Annual gross | Annual net | Effective rate |
|---|---|---|---|
| No overtime | $52,000 | $43,962 | 15.46% |
| 5 hrs OT / week | $61,750 | $51,796 | 16.12% |
| 10 hrs OT / week | $71,500 | $59,130 | 17.3% |
| 15 hrs OT / week | $81,250 | $65,989 | 18.78% |
Ten hours of overtime a week raises gross by $19,500 and net by $15,168. The effective rate rises from 15.46% to 17.3% — a few points, because more of your income now sits in a higher bracket. Not a penalty; just the ordinary progressive curve.
Every overtime hour at $25 base pays $37.50 gross. After tax at this income you keep roughly $31.01 of it.
Bonuses are the sharper version
Supplemental pay — bonuses, commissions, severance — is often withheld at a flat 22% federal rate regardless of your actual bracket. If your effective rate is 12%, a bonus appears to lose nearly twice as much as it should.
Same mechanism, same resolution: it is withholding, not tax. You reconcile at filing.
Who is entitled to overtime
Under federal law, non-exempt employees must receive at least 1.5× their regular rate for hours beyond 40 in a workweek. Exempt employees — generally salaried workers above a salary threshold in executive, administrative, or professional roles — are not entitled to it.
Some states go further. California requires daily overtime beyond 8 hours in a day and double time beyond 12, which can make the same hours worth considerably more than the federal minimum. Job title alone does not determine exempt status; the duties test and salary threshold do.
If the withholding bothers you
Consistent overtime that produces a large refund every year means you are lending money to the government interest-free. Adjusting your W-4 to account for expected annual income smooths the withholding across the year. We cover how to think about that separately.
To model overtime here, convert your expected annual gross to an hourly equivalent and enter that, or raise the hours-per-week slider — though note the slider applies your base rate to all hours rather than a 1.5× premium, so it understates a true overtime scenario.