is overtime taxed more
June 02, 2023

Understanding Overtime Taxation: Is Your Extra Income Really Taxed More

Personal Taxes

The lack of understanding of overtime taxation is often the reason employees are hesitant to accept more work than they already carry. Your extra income is taxed at the same rate as your salary unless the additional pay pushes you to a higher tax bracket.

Creating additional revenue can also make you ineligible for certain tax credits, and you may not qualify for EITC or similar credits if you decide to work extra hours.

This guide to understanding overtime taxation will help you determine if working more than forty hours per week really pays off.

The Difference Between Regular And Overtime Pay

The Difference Between Regular And Overtime Pay

The compensation employees receive biweekly or monthly is considered regular pay while working forty hours per week. Regular pay is taxable, and an employer must withhold income, social security, and Medicare taxes from each employee’s salary.

Regular pay doesn’t include bonuses, tips, reimbursement of travel expenses, or any other additional income an employee might receive from their employer.

To calculate your hourly rate, you must divide the overall amount you earn weekly by the number of hours you work every week. For example, if you make $750 per week, you’ll have to divide this amount by forty to get the hourly rate of $18.75.

Knowing your hourly rate will help you calculate your overtime pay. According to the Fair Labor Standards Act, all non-exempt employees who work over forty hours a week for the same employer are eligible for overtime pay.

This type of income is added to the employee’s regular pay and isn’t taxed differently.

The Minimum Overtime Pay

The Minimum Overtime Pay

The Fair Labor Standards Act prevents employers from paying their employees less than 1.5 of their hourly rate for each hour of overtime work.

Some companies double their employees’ hourly rates to motivate them to accept additional workloads and reward them for their effort. Most states follow federal overtime rules, but California, Colorado, Kansas, Alaska, and Hawaii have their own overtime laws.

Under California law, an employer must double the standard hourly rate for all employees who work over twelve hours in a day or work for eight hours for the seventh consecutive day.

Federal and state overtime rules apply to all non-exempt employees. The Fair Labor Standards Act defines a non-exempt employee as any employee eligible to receive overtime pay at 1.5 times their hourly rate.

Employees who earn up to $107,432 per year are generally considered non-exempt. As a result, high-earning individuals who hold ‘white collar’ positions are usually exempt from overtime pay.

Understanding Tax Brackets

Understanding Tax Brackets

The progressive tax system involves using different tax rates for certain portions of your income. Hence, the first $11,000 of your salary will be taxed at a 10% rate regardless of how much you earn per year.

In case you make under $44,725 per year, your income will be taxed only at 10% and 12% rates. Please remember that width of each tax bracket depends on your filing status, so if you qualify for Head of Household, your income will be taxed at 12% even if you earn over $50,000 per year.

Taxpayers eligible for Married Filed Jointly filing status fall into the 22% tax bracket only if their income exceeds $89,450.

The IRS adjusts tax brackets each year to compensate for inflation, which is why you must check this year’s tax brackets before filing taxes. It’s important to note that your tax bracket is determined based on your taxable income, not the gross income.

In some instances, overtime pay can push you into a higher tax bracket, but you’ll only be taxed at a higher rate for the period during which you were earning more than your regular pay.

It can also disqualify you from certain tax credits, so you won’t be able to claim Earned Income Tax Credit if the overtime pay pushes you over the income limits for families with one, two, or more children.

Calculating Overtime Pay

Calculating Overtime Pay 

Determining how much you’ll earn from overtime work isn’t difficult if you know your hourly rate and the number of hours you will work.

If you earn $18.75 per hour, you must multiply this number by 1.5 to calculate your hourly overtime rate, which in this instance would be $28.1. You should then multiply the number of extra hours by your overtime hourly rate to calculate the amount you’ll earn.

Your overtime pay will be $281 if you work ten additional hours in a month or $562 if you decide to work 180 hours in a month instead of 160 hours. In either case, this sum is unlikely to affect your tax bracket or increase your tax liability.

Overtime will be taxed at the same rate as the regular pay. To calculate how much you’ll have after taxes, you just have to multiply the amount you earned by the applicable tax rate.

Let’s say your filing status is single, you earn less than $44,725 per year, and you work twenty extra hours in a month. In this scenario, you’ll have to multiply $562 by 12% (0.12) and then subtract $67.44 from the gross overtime income amount.

Hence, your net monthly pay will increase by $494.56 if you do additional twenty work hours per month. Please note that this calculation doesn’t include payroll taxes your employer must withhold from your salary.

Reasons to Work Overtime

Reasons to Work Overtime

Earning more money isn’t the only reason you may consider accepting overtime work. Overtime can also help you pay off debts, save money for a new business venture or increase your buying power.

Sometimes working long hours can help you improve your skills or clear out a backlog after a vacation. Inefficient time management or seasonal increase in work volume are some of the most common reasons companies offer overtime work to their employees.

Still, companies are sometimes reluctant to offer additional work hours to employees, and they limit the maximum number of overtime hours an employee can work in a month.

That’s why you shouldn’t accept additional hours before understanding the company’s overtime policy and how much you can potentially earn.

Deciding if Working Longer Hours is The Right Thing For You

Working longer hours affects work-life balance, and in some cases, it leads to burnout. You shouldn’t agree to overtime if the financial benefits don’t outweigh the potential risks.

Health concerns, inability to stay focused, or insufficient time to rest properly are some dangers of working overtime continually. As a result, the money you’ll earn doesn’t always justify the effort.

Moreover, you should check if the overtime pay can affect your tax bracket so that you can know if a sizeable chunk of the extra income will go into taxes.

Frequently Asked Questions

Do All States Have Double Overtime Laws?

California is currently the only state that requires employers to pay employees their double hourly rate if they work more than twelve hours a day.

How Many Overtime Hours Can I Work Per Month?

Federal laws don’t limit the number of overtime hours employees can work each month. Still, employers often don’t offer more than ten hours of overtime per week due to limited financial resources.

Are Overtime and Regular Pay Taxed Separately?

Employers add overtime pay to the employee’s regular salary before withholding payroll taxes.

Can Overtime Be Mandatory?

Most businesses expect their employees to work extra hours whenever necessary. Currently, there are no regulations that prevent companies from making overtime mandatory.

Is Working Overtime Worth The Effort?

Your extra income will only be taxed more than your regular pay if the additional income pushes you to a higher tax bracket.

This can only happen if your taxable income is close to the tax bracket’s limit. So, if your annual taxable income is between $60,000 and $70,000, working overtime is unlikely to move you to a different tax bracket.

From a strictly financial point of view, overtime almost always pays off because it doesn’t significantly affect your taxes. Still, you should ensure you’ll qualify for tax credits you want to claim on your tax return before accepting additional hours.


Logan Allec, CPA

Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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