What Percentage Is Overtime Taxed? Marginal Rate and the 2025 Deduction

Overtime pay is taxed at your regular marginal federal income tax rate, which for most workers falls in the 12%, 22%, or 24% bracket, plus 7.65% in Social Security and Medicare taxes. There is no special overtime tax rate. So when people ask what percentage overtime is taxed at, the honest answer is: whatever bracket your total yearly income lands in, with payroll taxes on top. The reason an overtime paycheck often looks like it was taxed at 30% or 40% is a withholding quirk, not a higher rate, and much of that money comes back at filing time. A new federal deduction running from 2025 through 2028 also lets many workers shelter part of their overtime premium from income tax entirely.

The Marginal Rate That Actually Applies

Federal income tax is progressive. Different slices of your income are taxed at different rates, and overtime simply stacks on top of your other earnings. Whatever bracket your total income reaches is the rate that applies to those last dollars.

For 2026, a single filer’s brackets are:¹

10% 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% over $640,600

These apply to taxable income, which is your gross income minus the standard deduction ($16,100 single, $32,200 married filing jointly in 2026) and any other above-the-line deductions.¹

Here is a practical example. A single filer earns $55,000 in regular wages. After the $16,100 standard deduction, taxable income is $38,900, placing the worker in the 12% bracket. Add $8,000 of overtime. Taxable income rises to $46,900, still inside the 12% bracket. Federal income tax on that $8,000 of overtime is roughly $960, or 12%. If overtime pushes a portion of earnings past a bracket threshold, only the dollars above the threshold are taxed at the higher rate. Overtime never retroactively raises the rate on your regular wages.

Payroll Taxes on Top

Federal income tax is only part of the deduction. FICA takes a separate cut on every dollar of overtime wages, and the new overtime deduction does not reduce it.

Social Security: 6.2% on wages up to $184,500 in 2026. After you cross that cap for the year, this stops.²
Medicare: 1.45% on all wages, no cap.³
Additional Medicare Tax: an extra 0.9% on earnings above $200,000 (single) or $250,000 (married filing jointly). Workers who log heavy overtime cross this line more often than they expect.⁴

For most workers, FICA adds a flat 7.65% to whatever income tax rate applies. Combine that with a 22% federal withholding rate on a supplemental paycheck and nearly 30% of the gross can disappear before state tax even enters the picture.

Why the Paycheck Looks Taxed Higher Than That

Withholding is an estimate. Actual tax liability is calculated once a year when you file. The gap between the two is where the sticker shock lives.

The IRS classifies overtime as “supplemental wages,” the same category as bonuses and commissions. Employers can use either of two methods to withhold federal income tax on it, and the method they choose explains most of the difference between what you see on the stub and what you actually owe.⁵

The Flat 22% Method

When supplemental wages are identified separately from regular pay, the employer can withhold a flat 22% for federal income tax regardless of your W-4. If your supplemental wages from a single employer exceed $1 million in the calendar year, the rate on the excess rises to 37%.⁵

The Aggregate Method

Many payroll systems instead combine your overtime with your regular wages for that pay period and compute withholding as if the inflated total were your normal paycheck. The software essentially annualizes the bigger number.

Say you normally earn $2,000 biweekly, but one check comes in at $3,200 after overtime. The system treats you as if you earn $3,200 every two weeks, or $83,200 per year, instead of your actual $52,000. That bumps the calculation into higher withholding brackets and pulls more from that single check. The excess is not lost. It returns as a refund once you file and reconcile.

The 2025–2028 Overtime Deduction

The One, Big, Beautiful Bill Act created a federal income tax deduction for qualified overtime compensation, effective retroactively to January 1, 2025, and scheduled to expire after December 31, 2028. It covers the premium portion of your overtime pay, meaning the extra half in “time-and-a-half.” If your regular hourly rate is $30 and you earn $45 per overtime hour, the deductible amount is the $15 premium, not the full $45.⁶

The deduction is capped at $12,500 per return, or $25,000 for joint filers, and it phases out once modified adjusted gross income exceeds $150,000 single or $300,000 joint. Both itemizers and non-itemizers can claim it.⁷

Eligibility is narrower than it sounds. Only workers entitled to overtime under the Fair Labor Standards Act qualify. You must be both covered by the FLSA and not exempt from its overtime requirements. Salaried workers classified as exempt, independent contractors, and workers whose overtime comes solely from a union contract or state law are excluded.⁷

Married taxpayers must file jointly to claim it, and your Social Security number has to be on the return. Beginning with tax year 2026, employers are required to report qualified overtime compensation separately on your W-2.⁶

Two limits are worth repeating. The deduction only reduces federal income tax; your overtime wages remain fully subject to Social Security and Medicare. And the $12,500 cap means workers who pile up large amounts of overtime shelter only part of their premium, with the rest taxed at the normal marginal rate.

State Income Tax

Most states with an income tax treat overtime the same way federal rules do, and many state payroll systems mirror the aggregate withholding method, so state withholding on an overtime check is similarly inflated. Flat supplemental withholding rates across states run roughly from about 5% to nearly 12%. Several states have no income tax at all. Over-withholding at the state level corrects itself when you file your state return.

Fixing Over-Withholding

If you work overtime regularly and get a large refund every year, your employer is pulling too much from each paycheck. You can adjust this through Form W-4.⁸

Step 3 lets you account for anticipated tax credits, which lowers each period’s withholding directly. Step 4(b) lets you enter expected deductions beyond the standard deduction. Step 4(c) does the opposite, adding a flat dollar amount per paycheck for workers who tend to owe.⁹

The IRS Tax Withholding Estimator at irs.gov is the most reliable way to pick the right numbers. Run it once at the start of the year and again mid-year when your overtime pattern is clearer. Going too far the other way can trigger an underpayment penalty, so most workers aim to match last year’s total tax through withholding, which protects them regardless of how much overtime they end up earning.¹⁰

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
2
Social Security Administration. Contribution and Benefit Base
3
Social Security Administration. Social Security and Medicare Tax Rates
4
Internal Revenue Service. Topic No. 560, Additional Medicare Tax
5
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
6
Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
7
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
8
Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate
9
Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate
10
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty