You’ve had a lot of extra expenses lately—and money has been tight. So when your boss gives you the chance to work overtime, you jump on it. Time-and-a-half pay is just the extra income you need.
But when pay day arrives, the increase on your paycheck isn’t as high as you’d expected. What’s going on? Is overtime pay taxed at a higher rate?
How overtime is calculated
Any non-exempt employee is legally required to earn 150 percent of their usual hourly rate for any time worked beyond the 40-hour work week. If you normally earn $20 per hour, then you would earn $30 for each overtime hour you work. This is your gross income—i.e., the amount you earn before anything is taken out for taxes or deductions.
Withholding for overtime pay
Withholding tax is not calculated differently for overtime pay than it is for regular pay. However, if you work overtime, this increases your gross pay—which could bump you into a different wage bracket with higher income tax withholding rates.
For example, if you’re a single person who makes $20 per hour, your gross income in one 40-hour work week would be $800. For tax year 2018, your income tax withholding on this amount would be $18.30 plus 12 percent (which equals $83.82).
However, let’s say you also work five hours of overtime. Now your new gross income for the week is $950, which pushes you into a higher wage bracket, where your withholding is $85.62 plus 22 percent (which equals $115.32).
Therefore, although you earned an additional $150 that week, you also had an additional $31.50 withheld from your paycheck—which you may not have been expecting.
For more information on how income tax withholding works, see our post on how the new tax law can affect your paycheck withholding.