You just pulled a sixty-hour week. You’re exhausted, your feet hurt, and you’ve missed three dinners with your family just to hit that project deadline or cover for Dave, who’s "sick" again. But then the direct deposit hits. You open the app, expecting a windfall, and your heart sinks. Where did the money go? It looks like the IRS took a massive bite out of your hustle. It’s enough to make anyone wonder: is overtime still taxed, or is there some secret rule that kicks in the moment you cross that forty-hour threshold?
Let's get the blunt truth out of the way immediately. Yes, overtime is absolutely still taxed. There is no magical federal exemption for working hard. In fact, under current U.S. law—specifically the Fair Labor Standards Act (FLSA) and the Internal Revenue Code—every dollar you earn above your regular rate is considered "supplemental wages" or simply ordinary income. It’s all taxable.
But there is a catch. Or rather, a nuance that messes with your head every time you look at your paystub.
The Withholding Trap: Why Your Boss Might Be "Over-Taxing" You
The biggest misconception people have is that overtime is taxed at a higher rate than regular pay. Technically, it isn't. At the end of the year, when you file your 1040, the IRS doesn't care if a dollar came from your first hour on Monday morning or your fiftieth hour on Sunday night. It’s all one big bucket of "Adjusted Gross Income."
So why does the check look so small?
It’s about withholding.
Payroll software is, frankly, a bit dumb. Most systems look at your check for a single pay period and assume you make that much every week. If you normally make $1,000 a week, the system calculates your taxes based on a $52,000 annual salary. But if you work a ton of overtime and pull in $2,000 in a single week, the software panics. It thinks, "Whoa, this person is now on track to make $104,000 a year!"
Because the U.S. uses a progressive tax system, higher earners are pushed into higher brackets. The software bumps you into a higher withholding tier for that specific check. You aren't actually paying more in taxes in the long run; you're just pre-paying a larger chunk to the government. It’s basically an interest-free loan you’re giving to Uncle Sam until you get your tax refund next spring.
The Math Behind the Madness
Let’s look at a quick, messy example. Imagine you’re a single filer. In 2025 and 2026, the tax brackets shift slightly for inflation, but let's say you're usually in the 12% bracket. Your overtime pay might suddenly get hit at the 22% withholding rate.
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That’s a huge jump.
It feels like a penalty for working. It’s incredibly frustrating. You’re trading your sleep and your sanity for time-and-a-half, but the government is snatching a bigger percentage of that "half" than they do of your "time." Honestly, it’s one of the most common reasons people turn down extra shifts. They see the 22% or 24% disappearing and decide the couch looks a lot better than the warehouse floor.
Is Overtime Still Taxed Differently Under New Proposals?
You might have heard some chatter in the news lately about "ending taxes on overtime." This became a massive talking point during the recent election cycles. Some politicians have floated the idea that we should just stop taxing anything over 40 hours a week to incentivize productivity.
As of right now, that is purely talk.
There is no law on the books in 2026 that exempts overtime from federal income tax. If you see a TikTok or a "finance guru" claiming you can fill out your W-4 in a special way to avoid overtime tax, be very careful. They’re usually suggesting you claim "exempt" for a pay period. While that keeps the money in your pocket today, it creates a massive bill—and potentially penalties—when tax season rolls around.
The IRS doesn't forget. They always get their cut.
State Taxes and the Local Level
We’ve mostly been talking about the federal level, but your state wants its piece too. Most states follow the federal lead. If you live in a place like California or New York, the progressive withholding is even more aggressive. However, if you’re lucky enough to live in a state with no income tax—like Florida, Texas, or Washington—you only have to worry about the federal bite and the standard FICA (Social Security and Medicare) deductions.
FICA is a flat rate. It doesn't care how much you work. You’re losing 7.65% for Social Security and Medicare on every single dollar until you hit the Social Security wage cap. That part is predictable, even if it is annoying.
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The "Time and a Half" Illusion
The law says that for most hourly workers, overtime must be paid at a rate of at least 1.5 times the regular rate. If you make $20 an hour, your overtime is $30.
But wait.
When you factor in the increased withholding we talked about, your "net" hourly rate for those extra hours might actually be closer to your regular regular pay rate.
Think about it this way:
- Regular Pay: $20/hr. After 12% tax, you keep $17.60.
- Overtime Pay: $30/hr. After 22% withholding, you keep $23.40.
You’re still making more! Don't let the sticker shock of the withholding fool you into thinking you're working for free. You are still ahead. It just doesn't feel as "bonus-heavy" as the phrase "time and a half" implies.
Misclassifications: The Sneaky Way You Lose Out
Sometimes the question isn't whether overtime is taxed, but whether you're even getting it. Employers love to play games with titles. Have you been told you're "salaried exempt"?
A lot of people think that if they have a salary, they aren't eligible for overtime. That’s a lie.
The Department of Labor (DOL) has specific salary thresholds. If you make below a certain amount (the threshold was recently raised to over $58,000 annually for many roles), your boss might still owe you overtime even if you are on a salary. If they aren't paying it, they're breaking the law. And if they are paying it under the table to "save you on taxes," they are putting you—and themselves—at massive risk for an audit.
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Avoid "under the table" overtime. It sounds great because it isn't taxed, but you lose out on Social Security credits, you have no legal protection if the check bounces, and the IRS treats it as tax evasion. It’s never worth the headache.
How to Handle the Overtime Tax Bite
If you know you’re going to be working a massive amount of overtime for a sustained period—maybe a seasonal rush or a big three-month construction project—you can actually do something about the withholding.
You can update your W-4.
Most people set their W-4 when they get hired and never touch it again. But you can adjust your "Extra Withholding" or your allowances to account for the fact that the system is overestimating your annual income. Just be sure to change it back once the overtime stops. If you don't, you'll end up owing a massive amount in April.
It’s a balancing act.
Bonuses vs. Overtime
People often confuse overtime with bonuses. Both are considered supplemental wages, but they are often withheld differently. Bonuses are often hit with a flat 22% withholding rate regardless of your income level. Overtime, because it's usually bundled into your regular check, is subject to the aggregate method (the "panicked software" method we discussed).
Both end up in the same tax bucket at the end of the year.
Actionable Steps to Protect Your Paycheck
Stop guessing and start tracking. Here is how you actually handle the "is overtime still taxed" frustration:
- Run a Mid-Year Check: Use the IRS Tax Withholding Estimator around July. Plug in your year-to-date earnings, including that overtime. It will tell you if you’re on track for a refund or a bill.
- Verify Your "Exempt" Status: Check the latest DOL guidelines. If you’re earning less than $1,128 per week (as of the latest updates), you might be entitled to overtime pay regardless of your job title.
- Contribute to a 401(k): If the overtime is pushing you into a higher bracket and you hate seeing the money go to the IRS, put some of those extra earnings into a traditional 401(k) or 403(b). This lowers your taxable income. You’re essentially "hiding" the overtime pay from the IRS while building your own wealth.
- Keep Records: Keep your paystubs. If your employer is manually calculating taxes and it looks "off," ask for a breakdown. Software errors happen.
- Understand the Refund: If you see a massive chunk taken out of your overtime, remind yourself: This is not gone forever. If you were over-withheld, you will get every penny of that excess back when you file your taxes.
Working extra hours is a grind. It’s a sacrifice of your most precious resource: time. While the tax reality is frustrating, knowing how the system actually works prevents you from making emotional decisions—like quitting a high-paying shift just because the withholding looks scary. The money is still yours; the government is just holding onto it for a little while.
Next Steps for You:
Check your last three paystubs. Look specifically at the "Federal Income Tax" line on a week where you worked overtime versus a week you didn't. If the percentage jumped by more than 5%, consider adjusting your W-4 for the next quarter to keep more of that cash in your pocket now rather than waiting for a refund next year. If you're unsure about your classification, visit the Department of Labor’s "Wages and the Fair Labor Standards Act" page to ensure you're actually being paid the 1.5x rate you're legally owed.