There is no special overtime tax rate. The federal government taxes overtime pay at the same ordinary income tax rates that apply to your regular wages, and FICA takes the same flat 7.65% from every overtime dollar it takes from your regular pay. What changed in 2025 is a new above-the-line deduction that lets many hourly workers subtract part of their overtime earnings from taxable income through 2028. If your overtime paychecks look like they were taxed at a punishing rate, the cause is almost always how your employer estimated withholding for that pay period, not how the IRS will calculate what you actually owe.
Overtime Is Taxed as Ordinary Income
The Internal Revenue Code defines gross income to include all compensation for services, whether earned in your first hour of the week or your forty-fifth.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined Nothing in the tax code sets a separate rate for hours worked beyond forty. Your total annual taxable income determines which marginal brackets apply, and every dollar of overtime lands in the same bucket as your regular wages.
For tax year 2026, the federal brackets for single filers are:2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10% on taxable income up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% above $640,600
For married couples filing jointly, each threshold is roughly double the single-filer amount; the 22% bracket begins at $100,800 and the 37% bracket at $768,700.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers, which reduces the income that runs through those brackets.
Overtime does not push all of your income into a higher bracket. If your taxable income sits at $49,000, near the top of the 12% bracket, and $5,000 in overtime brings you to $54,000, only the $3,600 above the $50,400 threshold is taxed at 22%. Everything below that line is still taxed at 10% and 12%.3Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed More overtime always means more take-home pay.
The 2025–2028 Overtime Deduction
Beginning with tax year 2025 and running through 2028, a new above-the-line deduction lets qualifying workers subtract a portion of their overtime pay from taxable income. It was created by the One, Big, Beautiful Bill Act (P.L. 119-21) and codified at IRC §225.4Internal Revenue Service. One, Big, Beautiful Bill – How to Take Advantage of No Tax on Tips and Overtime You can claim it whether you itemize or take the standard deduction.
The deduction covers only the premium portion of overtime pay, meaning the “half” in time-and-a-half. If you normally earn $20 per hour and are paid $30 per hour for overtime, the qualified amount is the extra $10 per hour, not the full $30. The annual cap is $12,500 for most filers and $25,000 for married couples filing jointly. It begins to phase out when modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).4Internal Revenue Service. One, Big, Beautiful Bill – How to Take Advantage of No Tax on Tips and Overtime
Who Qualifies
The deduction applies only to overtime compensation required under Section 7 of the Fair Labor Standards Act. To qualify, you must be covered by the FLSA and classified as a non-exempt employee entitled to time-and-a-half for hours worked beyond forty in a workweek.5Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Salaried workers who are exempt from the FLSA’s overtime rule, typically those in executive, administrative, or professional roles earning at least $684 per week, do not qualify even if their employer voluntarily pays them for extra hours.6U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption Overtime paid solely under a union contract or state law also falls outside the deduction unless the FLSA independently required it. And if your employer pays double time rather than time-and-a-half, only the half required by the FLSA counts; the additional premium your employer chooses to pay does not.5Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Why Overtime Paychecks Can Look Overtaxed
The sense that overtime is punished by the tax code usually comes from paycheck withholding, not from the tax itself. Employers follow the withholding procedures in IRS Publication 15 and Publication 15-T to estimate what to send to the IRS each pay period on your behalf.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
When overtime inflates one paycheck, many payroll systems project that higher amount across every remaining pay period of the year. If you normally take home $1,500 every two weeks but earn $3,000 during a heavy overtime stretch, the system calculates withholding as though you will earn $78,000 for the year instead of $39,000. That temporary projection pushes the estimate into a higher bracket, and the system withholds accordingly, even though you may never repeat that paycheck.
Some employers instead treat overtime as a supplemental wage and apply a flat 22% federal withholding rate to the overtime portion.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide For workers whose effective tax rate is well below 22%, that flat rate makes the overtime slice of the check look disproportionately taxed. Once supplemental wages paid to a single employee exceed $1 million in the year, withholding on the excess jumps to 37%.
Whichever method your employer uses, over-withholding comes back as a refund when you file. The withholding is a deposit against your estimated bill, not the bill itself.
FICA on Overtime
Every dollar of overtime is also subject to FICA payroll taxes at the same flat rates that apply to regular wages:8Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
- Social Security (OASDI): 6.2% of gross wages, up to the 2026 wage base of $184,500. Once combined regular and overtime earnings reach that cap, no more Social Security tax is withheld for the rest of the year.9Social Security Administration. Contribution and Benefit Base
- Medicare: 1.45% of all gross wages, with no cap.
Combined, that takes 7.65% from each overtime dollar until you reach the Social Security wage base. Your employer pays a matching 7.65% that does not appear on your pay stub.8Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
High earners face an additional 0.9% Medicare surtax on wages exceeding $200,000 for single filers and $250,000 for married filing jointly.10Internal Revenue Service. Topic No. 560, Additional Medicare Tax Once overtime pushes annual wages past that threshold, each additional dollar carries 2.35% in total Medicare taxes on top of income tax. FICA rates do not shift with the size of a single paycheck; they stay flat across every pay period.
Adjusting Withholding to Capture the Deduction
If you work overtime regularly and see large refunds every spring, your employer is likely over-withholding. You can pull that money into each paycheck by updating Form W-4.
The 2026 Form W-4 has a dedicated line for the new overtime deduction. On the Step 4(b) Deductions Worksheet, Line 1b asks for your estimated qualified overtime compensation, up to $12,500 ($25,000 for joint filers), if your total income falls below the $150,000 / $300,000 phase-out. Entering that figure reduces your withholding so the deduction shows up in each paycheck rather than as a lump sum at filing.11Internal Revenue Service. Employees Withholding Certificate Your employer must honor the updated W-4 and adjust withholding accordingly.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
State Taxes on Overtime
State treatment varies. A handful of states have no income tax at all, and among those that do, rates run up to about 13%. Most states that tax wages treat overtime as ordinary income under their standard brackets.
The new federal overtime deduction adds a wrinkle at the state level. States that use federal taxable income as their starting point often pick up the deduction automatically. States that start from federal adjusted gross income generally have to pass their own legislation to allow it, and a small number have already decided not to conform. Because these rules are still shifting, confirm with your state’s tax agency whether the federal overtime deduction also lowers your state bill.