How Overtime Pay Is Taxed in the US

You may have seen the viral claim that overtime is now tax-free. The reality is more interesting — and more useful to understand. Overtime pay is taxed as ordinary income at your marginal rate, and since 2025 there’s a new federal deduction that trims the tax on part of your overtime pay. Meanwhile, the reason your overtime check often looks over-taxed has nothing to do with a special overtime rate at all. Here’s the full picture, with the math.

The Short Answer: Overtime Is Taxed Like Regular Pay

There is no special “overtime tax rate” in the US. Overtime wages are ordinary income, taxed at your marginal tax rate — the same bracket your regular wages fall into. If you’re in the 22% federal bracket, your overtime dollars are taxed at 22%, not some higher penalty rate and not some lower bonus rate.

So why does an overtime-heavy paycheck sometimes show a surprisingly large tax bite? That’s a withholding quirk, not a tax-rate quirk — which brings us to the next section.

Why Your Overtime Check Looks Over-Taxed: Withholding

Employers often process overtime as “supplemental wages” — the same category as bonuses — and withhold federal income tax at a flat 22%. That flat rate is a one-size-fits-all guess, and it frequently misses your actual bracket:

• If your marginal rate is 12%, the 22% withholding takes too much — you’ll get the difference back as a larger tax refund when you file.
• If your marginal rate is 24% or 32%, the 22% withholding takes too little — you may owe the balance at tax time.

Either way, your actual tax on the overtime is still your marginal rate. Withholding is just the down payment. If your overtime is lumped into your normal paycheck instead of paid separately, it’s withheld at your regular W-4 rate and this whole issue disappears.

The 2026 “No Tax on Overtime” Rule: What It Actually Is

The One Big Beautiful Bill Act, signed in July 2025, created a new federal income-tax deduction for overtime pay — for tax years 2025 through 2028. It is not an exemption, and overtime is not tax-free. Here’s what the law actually does:

• Only the overtime premium qualifies — the “half” in time-and-a-half. Your base hourly rate for those overtime hours is still fully taxed. (Rough shortcut: divide your total overtime pay by 3 to isolate the premium.)
• The deduction is capped at $12,500 per year for single filers and $25,000 for joint filers, and it phases out above $150,000 / $300,000 in modified adjusted gross income.
• It’s an above-the-line deduction claimed on Schedule 1-A — you don’t need to itemize, and you can adjust your 2026 W-4 to reflect it.
• Only FLSA-required overtime qualifies (non-exempt workers, hours over 40 at 1.5×). Starting with 2026, employers report it in W-2 Box 12, Code TT.
• FICA taxes are unchanged. Social Security (6.2%) and Medicare (1.45%) still apply to every overtime dollar. Most states still tax overtime too.

Worked example of the deduction’s value: take a worker earning $25/hour who averages 10 overtime hours a week. Weekly overtime pay = 10 × $37.50 = $375, and the premium portion = 10 × $12.50 = $125. Over a year, the deductible premium = $125 × 52 = $6,500 — comfortably under the $12,500 cap. At a 22% marginal rate, that’s $6,500 × 0.22 = $1,430 in federal tax savings claimed at filing time. Real money — but nowhere near “tax-free overtime.”

Worked Example: What You Actually Keep From Overtime

Let’s put it all together for that same $25/hour worker doing 10 overtime hours a week, assuming a 22% federal marginal rate and the standard 7.65% FICA — a combined marginal rate of 29.65%:

• Weekly overtime gross: 10 hours × $37.50 = $375
• Tax at the combined marginal rate: $375 × 29.65% = $111.19
• Weekly take-home from overtime: $375 − $111.19 = $263.81
• Annual take-home: $263.81 × 52 = $13,718

Then the 2026 deduction adds roughly $1,430 back at filing time, bringing the effective annual keep to about $15,148. Notice the key point: taxes take roughly the same percentage from overtime as from regular pay — the marginal rate doesn’t jump just because the hours are extra.

3 Steps to Estimate Your Take-Home Overtime

• Step 1 — Gross it up: overtime hours × (your hourly rate × 1.5). You can check your gross with our overtime pay calculator.
• Step 2 — Apply your marginal rate: multiply by your federal bracket plus 7.65% FICA plus your state income-tax rate. That’s the tax on the overtime.
• Step 3 — Add the deduction’s value (if eligible): take the premium portion of your overtime (about one-third of the total at time-and-a-half) and multiply by your federal marginal rate. That’s roughly what you’ll save at filing time.

Frequently Asked Questions

Is overtime taxed at a higher rate than regular pay?
No. It’s taxed at your marginal rate, exactly like your regular wages. A bigger-looking bite on one paycheck is almost always a withholding quirk (the flat 22% supplemental-wage rate), not a higher tax.

Is overtime tax-free now?
No. The 2025–2028 federal deduction covers only the overtime premium (the “half” in time-and-a-half), capped at $12,500 ($25,000 joint), and you claim it when you file — your paycheck withholding doesn’t change by itself.

Do I have to itemize to claim the overtime deduction?
No. It’s an above-the-line deduction available whether you take the standard deduction or itemize.

Does the deduction apply to double-time or state-mandated overtime?
Only the FLSA-required premium qualifies. Overtime paid purely under state law or company policy — beyond what federal law requires — doesn’t count toward the deduction.