The Overtime Tax Myth: Why It Seems Taxed Higher
Overtime is not taxed at a higher rate — it is taxed as ordinary income. The confusion arises because overtime pay can push your annualized income into a higher tax bracket, causing your employer to withhold at a higher rate than usual for that check. Example: a worker normally in the 12% bracket earns overtime that, if annualized, would put them in the 22% bracket. The paycheck with overtime has higher withholding — but the annual tax reconciles correctly.
Why overtime withholding appears higher than regular pay withholding
| Regular Paycheck | Paycheck With Overtime | Why Withholding Differs |
|---|---|---|
| $1,500 gross | $2,200 gross (+$700 OT) | Annualized: $57,200 — higher bracket |
| 12% withholding rate | 22% rate on excess | Progressive system kicks in |
| Federal withheld: ~$66 | Federal withheld: ~$220 | Appears to be much more |
| Year-end reality: | Total income in 12-22% blended | Annual rate may be 14-16% effective |
Your annual tax return reconciles all withholding against your actual tax liability. If overtime pushed your withholding above your true liability (common if the overtime occurred in isolated pay periods), you receive the excess back as a refund. Your effective tax rate is determined by your total annual income, not by any single paycheck.
Is Overtime Worth It After Taxes?
- Overtime is always worth it after taxes — because no tax rate is 100%, you always keep more than you pay
- At 22% marginal rate: you keep 78% of each overtime dollar (plus state tax effect)
- At 24% marginal + 5% state: you keep 71% of each overtime dollar
- At any tax bracket: $1 of overtime earnings always puts more money in your pocket than $0 overtime earnings
- The only exception: if overtime income triggers phase-out of tax credits (Earned Income Credit ends at certain income levels)
Calculate Your Take-Home Pay With Overtime
Enter your regular and overtime hours to see your exact net paycheck with overtime income included.