Key takeaway
Overtime is not taxed at a higher rate — the IRS treats every dollar of wages the same, whether it came from hour 40 or hour 50. Take a worker earning $40/hour: a 50-hour week adds $600 of gross overtime pay, and at a 22% federal marginal rate she keeps $422.10 of it (70.3%). At a 12% marginal rate she keeps $482.10 (80.4%). The reason your overtime paycheck looks small is withholding, not tax: payroll software treats a $2,200 week as if you earn $114,400 all year.
The myth: overtime gets taxed more
The belief goes like this: "Time-and-a-half gets bumped into a higher bracket, so after taxes the overtime barely pays." It feels true because overtime paychecks really do shrink more than you'd expect. But the cause isn't a higher tax rate — it's the way withholding is calculated on a single unusually large paycheck. Your actual tax return treats overtime pay exactly like regular pay: same brackets, same rates, same standard deduction.
How marginal brackets actually apply to overtime
Marginal brackets apply dollar by dollar. Suppose your regular pay already fills part of the 22% bracket. Your overtime dollars simply stack on top and get taxed at whatever bracket they land in — for many earners, that's the same 22% bracket their last regular dollars faced. Overtime never re-prices your whole paycheck; it only ever touches the dollars above where your regular pay stopped.
- Overtime pay is wages: federal income tax, state tax, and FICA apply exactly as they do to regular hours.
- Only the marginal dollars above a bracket line face the next rate — your earlier dollars are untouched.
- FICA (7.65% for Social Security and Medicare) applies to overtime pay the same as regular pay.
The withholding illusion
Here's why the paycheck looks heavily taxed. Payroll software doesn't know this was a one-off overtime week. It takes your $2,200 weekly check and annualizes it: $2,200 × 52 = $114,400. Then it withholds as if you earn $114,400 every week of the year — which can push the withholding calculation into higher brackets. Your actual tax bill, though, is based on your real annual income. The actual tax on the extra $600 is just $132 at the 22% marginal rate. Any amount withheld beyond what you truly owe comes back at filing time as a bigger refund or a smaller balance due.
| Item | Amount |
|---|---|
| Overtime paycheck (50-hr week) | $2,200 |
| What payroll software assumes you earn all year | $114,400 |
| Actual extra federal tax owed on the $600 of overtime | $132.00 |
| Over-withholding above $132 | Returned at filing |
Worked example: $40/hour, 10 overtime hours
A worker earns $40/hour. A normal 40-hour week is $1,600 gross. A 50-hour week is $1,600 plus 10 hours at time-and-a-half ($60/hour) = $2,200 gross. The 10 overtime hours add $600 gross. Here's what actually happens to that $600:
| At a 22% marginal rate | Amount |
|---|---|
| Extra gross from 10 overtime hours | $600.00 |
| Extra federal tax (22%) | $132.00 |
| Extra FICA (7.65%) | $45.90 |
| Extra take-home pay | $422.10 |
| Share of overtime kept | 70.3% |
At a 12% marginal rate, the same $600 of overtime keeps $482.10 — 80.4%. Either way, you keep the large majority of every overtime dollar.
New for 2025–2028: the "no tax on overtime" deduction
A 2025 law — the One Big Beautiful Bill Act — added a federal income tax deduction for the premium portion of overtime pay, available for tax years 2025 through 2028. "Premium portion" means only the extra half in time-and-a-half: if your regular rate is $40/hour and your overtime rate is $60, the deductible amount is the $20 premium per hour, not the full $60. The headline facts:
- Cap: up to $12,500 per year for single filers, $25,000 for married couples filing jointly.
- Phase-out: begins above $150,000 of modified adjusted gross income ($300,000 for joint filers).
- Available to everyone who itemizes or takes the standard deduction — it is claimed above the line on the new Schedule 1-A.
- It is a deduction, not tax-free pay. Overtime is still fully subject to withholding, Social Security, Medicare, and state taxes. You claim the federal deduction when you file.
- Only overtime required by federal law qualifies. Overtime paid under state law, a union contract, or company policy alone does not count. For 2026 onward, employers must report qualified overtime separately on W-2s (Box 12, Code TT).
What does it save? Our $40/hour worker earns a $20 premium per overtime hour. Ten overtime hours a week for 30 weeks adds $6,000 of qualified premium — deductible federal income of $6,000, which saves $1,320 at a 22% marginal rate. That is on top of the regular math above: the overtime was already taxed like normal wages, and now part of it can be deducted at filing. (Per Treasury data cited in 2026 coverage, over 29 million taxpayers claimed this deduction in its first year, averaging over $3,100.)
Rules were clarified by the IRS in Fact Sheet 2026-13 (August 2026). If your W-2's qualified-overtime amount looks wrong, ask your employer for a corrected form — you cannot self-correct it on your return.
What to do with overtime pay
Because overtime dollars are taxed at your ordinary marginal rate, they're ordinary dollars — the only thing special is that they're extra. If you don't need the cash for expenses, overtime pay is a clean way to accelerate goals: build or top up an emergency fund, make an extra debt payment, or invest it. One practical option: if your employer lets you split direct deposits, route the overtime portion straight to savings so it never mixes with spending money. The tax treatment gives you no reason to prefer or avoid overtime — only your time and energy matter.
Common mistakes
- Turning down overtime over the myth. Declining $600 gross to "save" $177.90 in tax costs you $422.10 in take-home pay. The tax never eats the raise.
- Confusing withholding with tax. A $2,200 check annualizes to $114,400 in the payroll software, so withholding runs hot. Withholding is an estimate paid through the year; your actual tax is settled at filing.
- Assuming overtime is now tax-free. The "no tax on overtime" provision is a deduction on the premium portion (up to $12,500/year), not a tax-free paycheck. Withholding, FICA, and state taxes still apply, and only overtime required under the Fair Labor Standards Act qualifies — state-mandated or union-contract overtime does not.
- Assuming a bracket change makes you poorer. Even if overtime pushes some dollars into a higher bracket, only those dollars face the higher rate. More gross income always means more take-home pay.
Bottom line
Overtime is taxed at the same rates as regular wages — no surcharge, no special bracket. The $600 of overtime in our example keeps $422.10 at a 22% marginal rate and $482.10 at a 12% marginal rate. What looks like heavy taxation is just withholding on an annualized $114,400 pace, and the excess comes back at filing. Never turn down overtime because of taxes; you'd be paying full price in lost wages to save a fraction in tax. For the full paycheck picture, see the salary take-home pay table.
Run your own numbers
Our free Take-Home Pay Calculator estimates what any salary or hourly wage becomes after federal tax and FICA.
Related calculators
- Take-Home Pay — see what your full paycheck keeps after tax.
- Debt vs Invest — decide whether extra overtime pay should kill debt or be invested.
- Compound Growth — project what invested overtime earnings become over time.
Frequently asked questions
Is overtime taxed at a higher rate?
No. Overtime pay is taxed at exactly the same rates as regular wages. It goes through the same federal brackets, the same state tax, and the same FICA. Your overtime paycheck may show more withholding, but the actual tax rate on overtime earnings is no higher than on your regular pay.
Why does my overtime paycheck look so small?
Because payroll software annualizes your big paycheck. A $2,200 weekly check looks to the software like you earn $114,400 every week of the year, so it withholds tax as if you are in a higher bracket. You are not actually taxed that way — any over-withholding comes back to you as a larger refund (or smaller balance due) at filing time.
How much of $600 in overtime do I actually keep?
At a 22% federal marginal rate, you keep $422.10 of $600 in overtime pay: $132.00 goes to federal tax and $45.90 to FICA. That is 70.3% kept. At a 12% marginal rate, you keep $482.10, or 80.4%.
Should I turn down overtime because of taxes?
Almost never. Turning down overtime to save on taxes leaves you with less money, because you keep the majority of every overtime dollar — $422.10 out of $600 at a 22% marginal rate. You would pay $177.90 in tax to lose $422.10 of take-home pay. That is a bad trade.
Does overtime push me into a higher tax bracket?
Even if it does, only the dollars above the bracket line are taxed at the higher rate — your earlier dollars keep their lower rates. A higher bracket on some overtime never makes you poorer. You always keep most of each extra dollar, just a slightly smaller share of the dollars that land above the line.
Is overtime tax-free now under "no tax on overtime"?
Not tax-free — deductible. For tax years 2025 through 2028, the One Big Beautiful Bill Act lets you deduct up to $12,500 ($25,000 joint) of the premium portion of overtime required by federal law. Overtime is still subject to withholding, Social Security, Medicare, and state taxes; you claim the federal deduction when you file. Only the premium (the extra half in time-and-a-half) qualifies, and only for overtime required under the Fair Labor Standards Act.
Last updated: September 28, 2026