Why Is Overtime Taxed Higher? (Does Overtime Get Taxed Differently Than Regular Time?)

When you work your regular hours over the course of a month, you can expect to receive your regular earnings in your regular paycheck and your regular percentage of income tax deducted.

But what happens if you put in some overtime at work? Does overtime pay get taxed differently to regular time?

That’s exactly what this article is going to explore.

We’ll also endeavor to answer some of your most frequently asked questions along the way. Please feel free to scroll ahead to any section that gets your attention.

Why Is Overtime Taxed Higher (Does Overtime Get Taxed Differently Than Regular Time)

Understanding The Different Federal Income Tax Brackets And Rates For 2021

Before we can examine whether overtime actually gets taxed more than regular time, we must first seek to understand the different federal income tax brackets and their rates.

Please refer to the following table obtained from https://taxfoundation.org/publications/federal-tax-rates-and-tax-brackets/#brackets

RateFor Single IndividualsFor Married Individuals Filing Joint ReturnsFor Heads of Households
10%Up to $9,950Up to $19,900Up to $14,200
12%$9,951 to $40,525$19,901 to $81,050$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 or more$628,301 or more$523,601 or more

As you can see from the table provided above, the more money that you earn, the greater a percentage is taken from your wages as income tax.

However, please note that the table provided above is for federal income tax only, and there are also similar tables to be found for your state’s state income tax brackets and rates.

It is beyond the scope of this article to go through them all here, so please  ensure that you check out your particular state’s website to find out the regulations for your state income tax.

And, there’s also payroll tax to consider too. And Medicare and Social Security taxes.

Is Overtime Taxed Differently Than Regular Time?

Now, the truth is, overtime is not necessarily taxed differently from regular time.

Taxes on overtime are not any different from taxes on regular wages. And when you are filling out your tax return, you should calculate and withhold taxes from your overtime wages exactly the same way that you do for your regular wages. 

But, if you have had different amounts of federal or state income tax withheld from you from one month to the next, we understand why you may wonder if that’s truly the case, which leads us nicely onto your next section.

Why Does It Seem Like Overtime Is Taxed Differently From Regular Time?

Now, when you work overtime, your gross pay for the month will increase. Sometimes a little, sometimes a lot. 

Exactly how much it will increase depends on how many hours you work and your hourly rate.

You may even be offered an increased hourly rate for your overtime to compensate for being asked to work unsociable hours.

Now, having your gross pay increased one month could potentially mean that you will consequently fall into a different tax bracket for the year. It is not a given, but it could happen. Particularly if your usual wage for regular hours nears the top of a particular tax bracket.

Let’s take a look at an example. For this example, we will assume that you are filing your tax return as a single individual, and not as part of a couple or as the head of a household.

If doing your regular hours you normally earn the monthly equivalent of $40,500, then your monthly federal income tax would come to 12% of your gross earnings for that month. And 12% of $40,500 comes to $4,860.

However, if you did a few hours overtime one month, your gross earnings for that month will go up.

And if say this extra amount takes your gross earnings for the month to the monthly equivalent of $40,600, this will move you up a tax bracket when it comes to federal income tax, and you will now be required to pay up 22% of your gross earnings for that month. And 22% of $40,600 comes to $8,932.

So, you see, overtime is not taxed at a higher rate than regular time, but if doing overtime takes you over the threshold of a tax bracket, you could end up paying a greater portion of federal income tax than you otherwise would have.

Then you also have to consider other taxes such as state tax. 

Wrap Up

The key takeaway from this article, then, is that if you are offered overtime at your place of work, then your overtime rate does not automatically mean that you will receive the same take-home pay, or net pay after tax.

If doing overtime means that you will have to pay a greater portion of income tax, then you would be well advised to carry out these calculations before you agree to do any overtime.

That way, you can decide for yourself whether putting those extra hours in is really going to be worth the money that you actually take home.

Because if doing overtime for your employer means that you inadvertently find yourself moving up a tax bracket for federal or state income tax for that month, then your net take-home pay will take a bigger cut, and you simply won’t see as much of that extra earnings.

The government will expect its share of any dollar you earn while working extra hours. And you will have to judge for yourself whether what remains of your overtime after tax is worth the extra time, or whether it’s too taxing.

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