Overtime is not taxed at a special rate. It is ordinary wages, so it goes through the same federal income tax brackets as your regular pay and has the same 7.65% Social Security and Medicare withholding. For tax years 2025 through 2028, you can also deduct the premium part of FLSA-required overtime (the “half” in time-and-a-half), up to $12,500 a year ($25,000 on a joint return), with the deduction phasing out above $150,000 of modified AGI ($300,000 joint).
Most people notice overtime tax the first time a long week shows up on a paycheck. You worked ten extra hours, the gross pay jumped, and the net pay rose by less than you expected. It feels as if overtime is taxed at a special higher rate. It is not. What you are seeing is a mix of how withholding works and, since 2025, a new federal deduction that only shows up when you file your return.
This guide walks through what is actually taken out of overtime pay, why a big overtime check can look over-taxed, and how the federal “no tax on overtime” deduction works for tax years 2025 through 2028. If you want to run your own numbers while you read, the overtime tax calculator shows the take-home effect of extra hours.
Is overtime taxed at a higher rate?
For federal income tax, overtime is wages, just like your regular hours. There is no separate overtime tax bracket. Your total income for the year is run through the same brackets, and the extra dollars from overtime are taxed at whatever your top rate happens to be. For many hourly workers that is 10%, 12% or 22%.
Overtime is also subject to payroll taxes. Social Security takes 6.2% of wages up to the annual wage base and Medicare takes 1.45% of all wages, so 7.65% comes off every overtime dollar for most employees. State and local income tax may apply as well, depending on where you live and work.
Why does a big overtime check look over-taxed?
The surprise usually comes from withholding, not from the tax itself. Payroll software estimates your yearly income from each paycheck. When one check is much larger than usual, the software treats it as if you earned that much every pay period, so it withholds as if you were in a higher bracket all year.
IRS Publication 15 lists overtime pay among “supplemental wages.” When an employer pays it together with regular wages and does not separate the amounts, the whole check is withheld as one regular wage payment. When the employer identifies it separately, it may use the optional flat 22% federal rate for supplemental wages instead. Either way, withholding is only a prepayment. If too much comes out over the year, the difference comes back as a refund when you file.
A quick way to check this: compare your year-to-date federal withholding against what your full-year tax is likely to be, not the withholding on a single check.
What is the 2025 to 2028 overtime deduction?
Tax legislation passed in 2025 created a new federal deduction for “qualified overtime compensation,” found in section 225 of the Internal Revenue Code. The IRS describes it on its page about the “no tax on overtime” deduction. It applies to tax years 2025 through 2028.
The key points, as the IRS sets them out:
- Only the premium counts. If you are paid time-and-a-half, the deduction covers the “half,” the amount above your regular rate. The base pay for those hours is still taxable.
- Only FLSA-required overtime counts. The overtime must be required under section 7 of the Fair Labor Standards Act, which generally means hours over 40 in a workweek for non-exempt employees. Overtime paid only because of a union contract or a state daily-overtime rule does not qualify. If your employer pays double time, only the half-time portion required by the FLSA counts.
- There is a yearly cap. The maximum deduction is $12,500 per return, or $25,000 on a joint return.
- It phases out at higher incomes. The cap shrinks by $100 for every $1,000 of modified adjusted gross income above $150,000, or $300,000 for joint filers.
- Other conditions. You need a valid Social Security number, and married couples must file jointly. You can claim it whether you itemize or take the standard deduction.
The deduction reduces federal income tax only. It does not reduce Social Security or Medicare tax, and states decide for themselves whether to follow it.
How do you claim the overtime deduction?
The deduction is claimed on your tax return, not on your paycheck. Your employer keeps withholding the way it always has, so the paycheck shock described above does not go away. The benefit appears as a lower tax bill or a larger refund when you file.
For 2025, the IRS did not require employers to report qualified overtime separately on Form W-2. If you do not get a separate figure, the IRS says to use the instructions for the new Schedule 1-A to work out the amount from your pay records. Keep your pay stubs; they are the simplest evidence of how many overtime hours you worked and at what rate.
A worked example
Take a warehouse worker paid $24 an hour who works 10 hours of overtime a week for 50 weeks.
- Overtime rate: $24 × 1.5 = $36 an hour.
- Total overtime pay: $36 × 10 × 50 = $18,000.
- Qualified premium: $12 × 10 × 50 = $6,000.
All $18,000 is wages subject to Social Security and Medicare, so about $1,377 goes to payroll taxes. For federal income tax, the worker can deduct $6,000. If their top bracket is 12%, the deduction is worth about $720. The remaining $12,000 of overtime is taxed like any other wages.
If the same worker earned enough to push modified AGI to $160,000, the cap would drop from $12,500 to $11,500. In this example the claim is only $6,000, so the phase-out would not change anything.
Will overtime push me into a higher bracket?
Only the dollars above a bracket threshold are taxed at the higher rate. If overtime moves you from the 12% bracket into the 22% bracket, the earlier dollars are still taxed at 10% and 12%. You will never take home less in total because you worked more hours. A bigger bracket only ever applies to the slice of income above the threshold.
Benefits that depend on income can be different. Credits such as the earned income tax credit shrink as income rises, so extra income can reduce them. That is a reason to estimate the whole year, not a reason to turn down hours.
How can you get withholding closer to right?
If you regularly work overtime and get large refunds, you are lending money to the government interest-free. If you work irregular overtime and owe at filing time, you may want more withheld. The IRS Tax Withholding Estimator lets you enter year-to-date pay and withholding, and a new Form W-4 with your employer puts the result into effect.
The salary tax calculator gives a full-year view of income and payroll taxes, and the overtime tax calculator shows how much of a specific overtime week you keep.
Key points
- Overtime is taxed as ordinary wages. There is no special overtime rate.
- Large checks look over-taxed because withholding annualizes them. Any excess comes back at filing.
- For 2025 through 2028, the FLSA-required overtime premium can be deducted on your federal return, up to $12,500 ($25,000 joint), with a phase-out above $150,000 ($300,000 joint).
- Social Security, Medicare and most state taxes still apply to all overtime pay.
This article is general information, not tax advice. Rules can change, so check the IRS pages below or a tax professional for your situation.
Sources
- IRS: What to know about the No Tax on Overtime deduction
- IRS: Questions and answers about the deduction for qualified overtime compensation
- 26 U.S.C. § 225, Qualified overtime compensation
- IRS Publication 15, Employer’s Tax Guide (supplemental wages)
- U.S. Department of Labor: Overtime pay under the FLSA
FAQ
What does “How Is Overtime Taxed on Your Paycheck?” explain?
Overtime is not taxed at a special rate. It is ordinary wages, so it goes through the same federal income tax brackets as your regular pay and has the same 7.65% Social Security and Medicare withholding. For tax years 2…
How should I use this guide with a calculator?
Read the definitions and assumptions first, then open the linked calculator with the same inputs. Treat results as estimates, not professional advice.
Is this financial or medical advice?
No. Calcenzo content is educational. Confirm important decisions with a qualified professional and official sources for your situation.