You finally did it. You pushed through a brutal 60-hour week, fueled by lukewarm coffee and the promise of a fat paycheck. But when you open your banking app on Friday, the number staring back at you feels... off. It's smaller than you expected. You start doing the mental math and realize a massive chunk of that hard-earned "time-and-a-half" vanished before it even hit your account.
Naturally, you assume the government has a secret vendetta against hard workers. You’ve probably heard coworkers grumble in the breakroom that "overtime isn't even worth it because the tax man takes it all." It's a classic office myth. But honestly, the truth about what is the tax on overtime is a bit more nuanced than a simple "yes" or "no."
The Big Myth: Is There a Special "Overtime Tax"?
Let’s get the most important fact out of the way immediately. There is no such thing as a specific "overtime tax rate" in the United States. The IRS doesn't have a separate category for those extra hours you put in on a Saturday. From a purely legal standpoint, $100 earned during your regular shift is taxed exactly the same as $100 earned on overtime.
So why does your check look so depleted?
It comes down to withholding. When you earn a lot of extra money in a single pay period, your payroll software gets a little confused. It looks at that one "monster" paycheck and assumes you make that much every single week of the year.
If your normal check is $1,000 but your overtime-heavy check is $2,000, the system calculates your taxes as if your annual salary just doubled. It might bump you into a higher withholding bracket for that specific check.
You aren't actually paying more in taxes over the long run. You're just overpaying your "deposit" to the IRS for that month. Think of it like a temporary loan you're giving the government—one you'll eventually get back as a tax refund.
How the IRS Actually Sees Your Extra Income
To understand the tax on overtime, you have to understand the progressive tax system. In the U.S., we use marginal tax brackets. Currently, for the 2025 and 2026 tax years, these brackets range from 10% to 37%.
Here is how it works in reality:
Suppose you are a single filer earning $45,000 a year. Most of your income falls into the 12% bracket. If you work a ton of overtime and end up making $50,000 for the year, that extra $5,000 doesn't retroactively change the tax rate on your first $45,000. Only the extra money is taxed at the higher rate if it crosses a threshold.
The IRS treats your overtime as "supplemental wages" in some contexts, but for most hourly employees, it’s just added to your gross pay.
Withholding vs. Actual Tax Liability
This is where people lose their minds. Withholding is what your employer takes out now. Liability is what you actually owe at the end of the year.
If your employer withholds 25% of your overtime because they thought you were suddenly rich, but your actual tax rate is only 12%, you’ll see that 13% difference returned to you when you file your 1040 in April. It sucks in the moment because you want your cash now, but you aren't actually losing money to a higher tax rate.
💡 You might also like: 90 Pounds Sterling in Dollars: What You Actually Get After Fees and Inflation
The "Bonus" Trap and Supplemental Rates
Sometimes, overtime is processed similarly to bonuses. If your employer identifies your extra pay as "supplemental wages" separate from your regular hourly pay, they might use the "percentage method."
The IRS currently sets a flat withholding rate of 22% for supplemental wages.
If you usually sit in the 10% or 12% bracket, a 22% flat hit feels like a punch in the gut. It’s a huge jump. Again, this is just withholding. It’s not your final tax bill. But for someone living paycheck to paycheck, that "withholding gap" can cause real financial stress.
Real-World Example: Meet "Overtime Owen"
Let’s look at an illustrative example to see how the math shakes out.
Owen works in a warehouse making $25 an hour. Normally, he works 40 hours a week, making $1,000 gross. After standard deductions and taxes, he takes home maybe $820.
One week, the warehouse gets slammed. Owen works 20 hours of overtime at $37.50 an hour (time-and-a-half).
- Regular pay: $1,000
- Overtime pay: $750
- Total Gross: $1,750
When the payroll software sees that $1,750, it screams. "Owen is on track to make $91,000 this year!" it thinks.
At a $91,000 projection, the software starts withholding at the 22% or 24% marginal rate. Owen looks at his check and sees that instead of taking home the $1,400+ he expected, he’s taking home $1,250.
He feels robbed.
💡 You might also like: Loan Per Diem Calculator: Why Your Bank’s Math Might Surprise You
But at the end of the year, Owen only actually worked three weeks of overtime. His total income was only $54,000. His actual tax rate for the year remains low. He gets a $1,500 refund check in the spring.
Owen didn't pay more tax on overtime; he just paid it earlier than he needed to.
Does Overtime Ever Actually Cost You Money?
There is a very rare, very specific phenomenon called a "tax cliff," but it almost never applies to federal income taxes.
You will virtually never take home less total money by working more hours. Even if you move into a higher tax bracket, only the dollars above that line are taxed more.
However, overtime can affect:
- Phase-outs for Credits: If you are right on the edge of qualifying for the Earned Income Tax Credit (EITC) or specific child tax credits, a massive amount of overtime could push your Adjusted Gross Income (AGI) high enough to reduce these credits.
- Social Security Caps: This is actually a benefit. Once you hit the Social Security wage base limit ($176,100 for 2025), they stop taking the 6.2% FICA tax out of your check. If you work so much overtime that you cross this line, your take-home pay actually increases for the rest of the year.
- State and Local Taxes: Some states have different rules, but most mirror the federal "progressive" approach.
Strategies to Manage the Overtime Tax Hit
If you know you’re going to be working a lot of extra hours and you don't want to wait until April to see that money, you have a few options.
Adjust your W-4. You can technically change your withholdings at any time. If you’re married or have kids, you might be over-withholding anyway. By adjusting your "Step 4" on the W-4 form, you can tell your employer to take out less. Just be careful—if you underpay, the IRS will come for their pound of flesh (plus interest) later.
Max out your 401(k) or IRA. If you're worried about overtime pushing your taxable income too high, put that extra cash into a traditional 401(k). Since this is "pre-tax" money, it lowers your AGI. You’re essentially hiding that overtime money from the IRS while building your own future. It’s a win-win, provided you don’t need the cash for immediate bills.
Check your state's specific rules. States like California or New York have much more aggressive withholding tables. If you live in a high-tax state, the "sticker shock" of an overtime check will be significantly worse than if you live in Florida or Texas.
The Bottom Line on Extra Hours
The idea that overtime isn't worth it because of taxes is, frankly, a mathematical fallacy. You are always making more money by working more hours.
The psychological pain comes from the withholding jump, not the actual tax rate.
If you can view your overtime check as a mix of "now money" and a "forced savings account" that you'll get back in your tax refund, the sting isn't as bad.
✨ Don't miss: Air Products and Services: What Most People Get Wrong About Industrial Gas
Actionable Next Steps:
- Review your last "big" paystub: Look at the percentage of federal tax withheld compared to a normal week. If the percentage jumped more than 5-7%, your payroll software is likely over-projecting your annual income.
- Calculate your projected annual AGI: Use a simple online tax calculator to see if your extra hours will actually push you into a new marginal bracket for the entire year.
- Update your W-4 if necessary: If you consistently get a massive tax refund every year, you are over-withholding. Use the IRS Tax Withholding Estimator tool to see if you should reduce your withholding so you can keep more of your overtime pay in every check.
- Direct your OT to retirement: If you can afford it, set your 401(k) contribution as a percentage. When you work overtime, your contribution amount scales up automatically, keeping your taxable income lower and your future self richer.
Working extra is hard enough. Don't let a misunderstanding of how the IRS functions make it feel even more draining. You're still coming out ahead. Always.