Why Is Overtime Taxed So High? Brackets, FICA, and the 2025 Deduction

Overtime is not taxed at a higher rate than regular pay. The reason overtime paychecks look so heavily taxed comes down to two things working together: payroll software temporarily assumes you earn that inflated amount every pay period and withholds accordingly, and because overtime dollars are the last to stack onto your annual income, they land in your highest tax bracket. A federal deduction that took effect in 2025 now shelters some of that pay from income tax, but the withholding sting on the paycheck itself often has little to do with your actual tax bill.

Payroll Withholding Assumes You Earn That Much Every Week

Your employer calculates federal income tax withholding using IRS Publication 15 and Publication 15-T.¹ When overtime is paid on the same check as your regular wages, most payroll systems use the aggregate method: they add regular and overtime pay together, then treat that total as if you earned it every pay period for the whole year.

A biweekly check that normally runs $2,500 but jumps to $3,800 during a heavy overtime week gets annualized as roughly $98,800, even if your real yearly income is closer to $65,000. The software has no way to know whether you’ll work overtime once or every week, so it defaults to the higher estimate. That single paycheck gets withheld as if you’re earning at a much higher rate all year. This is the single biggest reason overtime feels so expensive.

When overtime is paid on a separate check or identified separately from regular wages, it counts as supplemental wages. Employers can then withhold a flat 22% for federal income tax regardless of your actual bracket.¹ For a worker whose real marginal rate is 12%, a flat 22% feels almost double what it should be. For someone in the 24% bracket, it’s actually a slight discount. Either way, 22% is a withholding estimate, not your final tax. Employers can also choose to run supplemental pay through the standard bracket-based tables instead.²

Progressive Brackets Put Overtime at the Top of the Stack

Beyond the withholding illusion, there is a real structural reason overtime dollars carry a higher rate: progressive marginal brackets. Federal income tax fills lower-rate brackets first, and each additional dollar is taxed at whatever bracket it falls into. For 2026, single filers face these rates:³

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

Married couples filing jointly get roughly double those thresholds. The 12% bracket extends to $100,800 and the 22% bracket to $211,400.³

Overtime is the last income to stack on your annual total, so it sits at the top of your bracket ladder. Take a single filer earning $60,000 in base pay. After the 2026 standard deduction of $16,100, taxable income is $43,900, entirely within the 12% bracket. Add $15,000 in overtime and taxable income climbs to $58,900. Every dollar above $50,400 is now taxed at 22%. That’s $8,500 of overtime taxed at nearly double the rate of the base salary.

Your average tax rate stays low, but the marginal bite on those extra hours is real. It isn’t a penalty for working harder. It’s how a bracket system works: the top slice of your income pays the top rate, and overtime is almost always the top slice.

FICA Takes 7.65% Off Every Overtime Dollar

Federal income tax gets the attention, but payroll taxes often do more damage to an overtime check than people realize. Every dollar of wages, regular and overtime alike, is subject to Social Security tax at 6.2% and Medicare tax at 1.45%, for a combined 7.65% off the top.

Social Security tax only applies up to the annual wage base, which is $184,500 for 2026.⁴ Most overtime workers fall well below that ceiling, so every extra dollar takes the full 6.2% hit. Medicare has no cap, and high earners pay an additional 0.9% Medicare surtax on wages above $200,000, or $250,000 for joint filers.⁵

One important limit: the new overtime deduction described below reduces federal income tax only. It does not reduce FICA. Social Security and Medicare still apply to every overtime dollar you earn.

The 2025 Federal Overtime Pay Deduction

The biggest change to overtime taxation in decades took effect in 2025. Under 26 U.S.C. §225, created by the One, Big, Beautiful Bill, workers who qualify can deduct up to $12,500 of overtime premium pay from federal taxable income, or $25,000 on a joint return.⁶ It’s available whether you itemize or take the standard deduction.

A few details trip people up:

Only the premium portion qualifies. When you work time-and-a-half, the deductible amount is the “half” above your regular rate. If your regular rate is $24 per hour and your overtime rate is $36, only $12 per overtime hour counts toward the deduction.⁷
You must be FLSA overtime-eligible. Salaried workers exempt from Fair Labor Standards Act overtime rules don’t qualify, even if their employer voluntarily pays them extra for long weeks.⁸
The deduction phases out. It shrinks by $100 for every $1,000 your modified adjusted gross income exceeds $150,000, or $300,000 on a joint return, and disappears at $275,000 for single filers or $550,000 for joint filers.⁶
Married filers must file jointly to claim it.⁸

In practical numbers, a single worker earning $55,000 in base pay with $9,000 in total time-and-a-half overtime has roughly $3,000 in deductible overtime premium. At a 22% marginal rate, that saves about $660 in federal income tax. A worker generating the full $12,500 in premium pay would save around $2,750 at 22%. The deduction doesn’t erase tax on overtime, but it takes a meaningful edge off.

How To Keep More of Each Overtime Paycheck

You don’t have to wait until filing to benefit from the deduction or to fix overwithholding. The 2026 Form W-4 includes a dedicated line for overtime. On the Step 4(b) Deductions Worksheet, Line 1b asks for your estimated qualified overtime premium pay, up to $12,500 (or $25,000 joint), provided your total income is below $150,000 (or $300,000 joint).⁹ That amount reduces your per-paycheck withholding across the rest of the year.

If your overtime hours swing, the IRS Tax Withholding Estimator at irs.gov can help you land in the right range. You enter year-to-date earnings, expected remaining income, and filing status, and it recommends a W-4 setup. The IRS suggests running the estimator again after any major income change.¹⁰

Be careful cutting withholding too aggressively. You’re generally safe from an underpayment penalty if your total withholding covers at least 90% of your current-year tax or 100% of last year’s tax, or 110% if your adjusted gross income exceeded $150,000.¹¹

If you don’t adjust the W-4, the money isn’t lost. Your actual tax is settled when you file Form 1040. If the aggregate method or the flat 22% pulled more than you owe, the IRS refunds the difference. For e-filed returns with direct deposit, the IRS expects most refunds within 21 days.¹² The catch is that overwithholding is an interest-free loan to the government until then. Adjusting your W-4 is the direct way to shrink that loan.

State Taxes Can Stack On Top

Everything above is federal. Most states with an income tax also withhold on overtime, and many apply their own flat supplemental rate to bonuses and overtime paid separately from regular wages. A handful of states have no income tax at all. If your overtime check looks especially thin, a state supplemental rate may be layered on top of the federal 22%. Check your pay stub for a separate state withholding line. The same overwithholding logic applies at the state level, and a state return can recover any overpayment.

1
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
2
eCFR. 26 CFR 31.3402(g)-1 – Supplemental Wage Payments
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
4
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
5
Internal Revenue Service. Additional Medicare Tax
6
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
7
Internal Revenue Service. How To Take Advantage of No Tax on Tips and Overtime
8
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
9
Internal Revenue Service. Employee’s Withholding Certificate Form W-4
10
Internal Revenue Service. Tax Withholding Estimator
11
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
12
Internal Revenue Service. IRS Opens 2026 Filing Season