Tracking overtime for hourly workers can be one of the biggest headaches for small business owners managing payroll on their own. If you’re one of those business owners, you might be wondering: Is overtime taxed more?
It’s easy for the overtime hour count to get out of hand as you manage a busy team, especially without time tracking tools with overtime alerts to warn you before it’s time to do payroll.
So, how will those overtime hours affect your payroll taxes?
Here’s the short answer: Overtime itself isn’t taxed more. But overtime earnings can push overtime workers into a new tax bracket.
Don’t worry — we’re going to answer your questions about overtime taxes and exemptions, so you feel empowered enough to run your own payroll without having to turn to a professional. Let’s dive in to learn more about overtime pay, how to calculate taxes with overtime, and overtime tax exemptions.
Is overtime taxed more?
Overtime hours — which the Department of Labor considers any hours worked outside a full-time, 40-hour week — aren’t taxed more. When running hourly payroll, you’ll withhold the same taxes from an employee’s overtime wages that you would from their regular wages.
You don’t have to make two separate calculations when withholding federal, state, and FICA (Federal Insurance Contributions Act, i.e. Social Security and Medicare) taxes from your employee’s earnings.
An employee’s overtime earnings can push them into the next tax bracket, however, in which case the IRS and state tax a greater percentage of their gross income, which comprises their combined regular and overtime income.
How is overtime taxed?
If you’re running your first payroll for an employee who worked overtime, deduct taxes from the sum of their overtime and regular earnings. So, if they made $1,000 in regular earnings and $300 in overtime earnings, you’ll add those amounts together and come up with a sum of $1,300.
On payday, here’s what you’ll withhold from that $1,300:
Employee-paid taxes
- Federal income taxes, which are based on employee earnings and W-4 withholding allowances
- FICA taxes: 6.2% for Social Security and 1.45% for Medicare
Employer-paid taxes
- FUTA (Federal Unemployment Tax Act) taxes: An employer pays a 6.0% tax on the first $7,000 of employee earnings
- SUI (State Unemployment Insurance): An employer pays a tax based on a state-provided rate
You can rest easy knowing there’s no specific overtime tax. You’ll just withhold the required taxes from an employee’s total income for that pay period, which is regular plus overtime earnings.
Yes, more overtime work can mean withholding more taxes, but that’s because employees just get taxed at a higher rate when their overtime earnings move them to the next tax bracket.
Overtime tax brackets
Because the legal overtime rate of pay is 1.5 times an employee’s regular hourly rate, staying on top of your small business labor costs means keeping an eye on costly overtime hours. It can also complicate employee taxes if their overtime hours push them into a higher tax bracket.
Let’s look at a few 2022 annual income tax brackets for single filers to see why that matters:
| Taxable income (for the year) | Tax due (for the year) |
| Up to but not over $10,275 | 10% of the taxable income |
| Over $10,275 but not over $41,775 | $1,027.50 + 12% of the excess over $10,275 |
| Over $41,774 but not over $89,074 | $4,807.50 + 22% of the excess over $41,775 |
Here’s where it gets tricky: If an employee makes $800 per week in 2022, you have to withhold taxes based on the second tax bracket on this chart.
But if they work overtime hours during a week in July and make $1,000, that pushes them to the third bracket. That means you’ll have to withhold more federal income taxes from their paycheck that week than you normally would.
How is overtime tax calculated?
While there’s no specific ‘overtime tax,’ you’ll need to calculate taxes for overtime just like you would for regular taxes.
Calculate your employee’s overtime tax
When running payroll, tax your employee’s overtime wages together with their regular wages. Let’s take a look at how you’d calculate the FITW (Federal Income Tax Withholdings) for an example employee, Joaquin, who we’ll pretend you pay weekly.
- Figure out your employee’s total taxable income. Joaquin makes $18 per hour and works 40 hours a week, so he made $720 in regular wages.
But Joaquin also worked 7 extra hours of overtime this week. So, according to the Fair Labor Standards Act, you have to pay him time-and-a-half, or 1.5 times his hourly wage for each overtime hour. Joaquin’s overtime rate is $27 an hour, and he made $189 in overtime wages.
Add the regular pay and overtime pay together to figure out what Joaquin’s taxable income is:
$720 (regular earnings) + $189 (overtime earnings) = $909 (total taxable income) - Determine your employee’s filing status. Use Joaquin’s Form W-4 to determine whether he has any dependents. His filing status is marked as ‘single,’ and he hasn’t indicated any other withholdings. That means he’ll have the maximum FITW taken from his paycheck compared to other employees who file jointly and/or have dependents.
- Use the Wage Bracket Method tables in the IRS’s Publication 15-T to calculate your employee’s income tax withholdings. Go to page 11 for the ‘Wage Bracket Method Tables for Manual Payroll Systems with Forms W-4 from 2020 or Later.’ Use the worksheet, or simply scroll down to the Weekly Payroll Period tables until you find Joaquin’s wage bracket for that week. Because he made $909 that week, and because he has standard withholding status as a single filer, you’ll withhold a standard deduction of $75 in income taxes for Joaquin.
It’s possible to do payroll taxes manually, but it takes time to calculate income tax withholdings for every employee. That’s why we recommend using an automated payroll provider software like Homebase to avoid tax liability and make this process faster, easier, and error-free.
Are there any exemptions to the overtime tax laws?
Knowing if your employees are exempt from overtime tax laws means figuring out whether they’re exempt from overtime pay. According to the FLSA (Fair Labor Standards Act), employees are exempt from overtime pay if they meet these requirements:
- You pay them on a salary basis: You pay an employee an annual salary rather than an hourly rate.
- You pay them the federal minimum weekly requirement. As of January 2020, employees aren’t entitled to overtime pay if their employer pays them a weekly minimum salary of $684 a week.
- Employee responsibilities pass the duties test for exempt white-collar workers. Employers don’t have to pay overtime if their employees’ job description passes the duties test for executive, administrative, and professional employees. For example, the FLSA outlines the primary duty of professional workers as one that involves “invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”
Visit Homebase’s state labor laws hub to learn more about your state’s requirements for employees who are exempt and non-exempt from overtime pay.
How Homebase can automate your payroll taxes
As a small business owner manually tracking time and running your own payroll, it’s not just taxes that worry you about overtime — it’s payroll compliance as well. You want to make sure you’re doing everything you can to follow your local labor guidelines for overtime.
Homebase’s free time clock tool takes that off your plate with automatic clock-outs and alerts notifying you when employees are getting close to overtime.
You can also use it to set up break and overtime rules that will keep you compliant with federal, state, and local labor laws, as well as FLSA rules.
Last but not least, Homebase’s HR tools and payroll features include an extensive library of resources, guides, templates, and automations to help you get started so that you don’t have to become your own HR expert when payday comes around.
Overtime tax FAQs
Why is overtime taxed?
Overtime is taxed because the IRS still considers it part of an employee’s income. Although no special overtime tax exists, you still have to withhold federal income and FICA taxes from an employee’s overtime wages.
Does overtime get taxed differently than regular time?
Overtime doesn’t get taxed any differently than regular wages. Overtime wages can, however, increase an employee’s gross pay enough that they’ll move into a higher tax bracket. For example, if an employee who usually earns $800 per week works enough overtime to earn $1,000 in one week, you’ll have to withhold more federal income taxes than you usually do during that week.
What are the tax brackets for 2022?
Below are the annual federal income tax brackets for 2022 according to the IRS’s Publication 15 – T. Keep in mind that these tax brackets are for standard withholding and not for employees who have checked the box in Step 2 of Form W – 4:
| Married Filing Jointly | ||||
| At least— | But less than— | The tentative amount to withhold is— | Plus this percentage— | Of the amount that the Adjusted Annual Wage or Payment exceeds— |
| $0 | $13,000 $0.00 | $0.00 | 0% | $0 |
| $13,000 | $33,550 | $0.00 | 10% | $13,000 |
| $33,550 | $96,550 | $2,055.00 | 12% | $33,550 |
| $96,550 | $191,150 | $9,615.00 | 22% | $96,550 |
| $191,150 | $$353,100 | $30,427.00 | 24% | $191,150 |
| $353,100 | $444,900 | $69,295.00 | 32% | $353,100 |
| $444,900 | $660,850 | $98,671.00 | 35% | $444,900 |
| $660,850 | … | $174,253.50 | 37% | $660,850 |
| Single or Married Filing Separately | ||||
| At least— | But less than— | The tentative amount to withhold is— | Plus this percentage— | Of the amount that the Adjusted Annual Wage or Payment exceeds— |
| $0 | $4,350 | $0.00 | 0% | $0 |
| $4,350 | $14,625 | $0.00 | 10% | $4,350 |
| $14,625 | $46,125 | $1,027.50 | 12% | $14,625 |
| $46,125 | $93,425 | $4,807.50 | 22% | $46,125 |
| $93,425 | $174,400 | $15,213.50 | 24% | $93,425 |
| $174,400 | $220,300 | $34,647.50 | 32% | $174,400 |
| $220,300 | $544,250 | $49,335.50 | 35% | $220,300 |
| $544,250 | … | $162,718.00 | 37% | $544,250 |
| Head of Household | ||||
| At least— | But less than— | The tentative amount to withhold is— | Plus this percentage— | Of the amount that the Adjusted Annual Wage or Payment exceeds— |
| $0 | $10,800 | $0.00 | 0% | $0 |
| $10,800 | $25,450 | $0.00 | 10% | $10,800 |
| $25,450 | $66,700 | $1,465.00 | 12% | $25,450 |
| $66,700 | $99,850 | $6,415.00 | 22% | $66,700 |
| $99,850 | $180,850 | $13,708.00 | 24% | $99,850 |
| $180,850 | $226,750 | $33,148.00 | 32% | $180,850 |
| $226,750 | $550,700 | $47,836.00 | 35% | $226,750 |
| $550,700 | … | $161,218.50 | 37% | $550,700 |
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
