Many workers ask the same question every year: how overtime is taxed in the United States. Some believe overtime is taxed at a higher rate. Others think it is unfairly penalized. With the recent overtime tax changes, confusion has grown even more.
The truth about how overtime is taxed in the United States is simpler than most people think. Overtime is not taxed at a special rate, but it can feel that way because of how federal income tax brackets work. The introduction of the no tax on overtime provision has added a new layer to the conversation.
In this guide, we will explain clearly how overtime is taxed in the United States, how overtime pay federal tax rules worked before the new law, how they work now, and what this means for your paycheck.
What Is Overtime Pay?
Overtime pay is compensation given to eligible employees who work more than 40 hours per week. Under federal labor laws, overtime must typically be paid at one and a half times the regular hourly rate.
For example:
If your hourly wage is $20
Your overtime rate becomes $30
The additional $10 is known as overtime premium pay.
Understanding this premium portion is essential because it directly affects how overtime is taxed in the United States under the new deduction rules.
How Overtime Was Taxed Before the New Law
Before the recent overtime tax changes, overtime pay was taxed exactly the same as regular wages. This is a key part of understanding how overtime is taxed in the United States historically.
There was no special overtime income tax exemption.
Overtime pay was subject to:
Federal income tax
State income tax (if applicable)
Social Security tax
Medicare tax
This means your overtime earnings were added to your total annual income. If your income increased enough, you might move into a higher tax bracket. That is why many workers believe overtime is taxed more.
In reality, how overtime is taxed in the United States has always followed the progressive federal tax system. Overtime is not taxed at a higher rate. It simply increases total taxable income, which may place part of your earnings into a higher bracket.
Why Overtime Feels Like It’s Taxed More
Many workers feel disappointed when they see their overtime paycheck.
The reason is withholding.
Employers often withhold federal income tax based on the size of that particular paycheck. A larger check may trigger higher withholding temporarily, making it seem like overtime payroll taxes are higher.
However, your actual tax liability is determined when you file your tax return, not when the paycheck is issued.
This misunderstanding affects how people perceive how overtime is taxed in the United States.
Federal Income Tax on Overtime
Federal income tax is progressive. That means income is taxed in layers.
For example:
First portion taxed at 10%
Next portion taxed at 12%
Next portion taxed at 22%
When you earn overtime, only the additional income that exceeds your bracket threshold is taxed at the higher rate.
This system applies to all wages, including overtime. It clearly shows how overtime is taxed in the United States under standard federal income tax rules.
Payroll Taxes on Overtime
In addition to federal income tax, overtime payroll taxes include:
6.2% Social Security tax
1.45% Medicare tax
These taxes apply to all earned income, including overtime.
The new overtime tax law does not remove these payroll taxes. Even under the no tax on overtime rule, Social Security and Medicare still apply.
Payroll structure is another important part of understanding how overtime is taxed in the United States fully.
How the New Overtime Tax Law Changes Things
The new overtime tax law introduced a qualified overtime deduction.
This means eligible workers may deduct part of their overtime premium pay from their federal taxable income.
It does not eliminate taxes entirely. It reduces taxable income.
This update modifies how overtime is taxed in the United States at the federal income tax level, but only for the premium portion.
How the Overtime Tax Deduction 2025 Works
The overtime tax deduction 2025 applies only to the premium portion of overtime pay.
If you earn:
Regular rate: $25
Overtime rate: $37.50
The extra $12.50 is the premium.
That premium may qualify for deduction, subject to limits.
Current deduction caps:
$12,500 for single filers
$25,000 for married filing jointly
Income phase-out rules apply at higher earnings levels.
This change affects how overtime is taxed in the United States beginning in 2025.
Is Overtime Taxed More Now?
The answer remains no.
Even after the overtime income tax exemption changes, overtime is not taxed at a higher rate than regular wages.
Understanding how overtime is taxed in the United States today requires separating deduction rules from tax rate rules.
Payroll taxes still apply.
State taxes may still apply.
Only federal income tax on the premium portion may be reduced.
Conclusion
Understanding how overtime is taxed in the United States is essential for workers who rely on extra hours to increase income.
Overtime has always been taxed like regular wages under federal overtime tax rules. The difference now is the introduction of the overtime tax deduction 2025, which allows eligible workers to reduce their federal taxable income.
However, payroll taxes still apply, and state taxes may still apply.
The new no tax on overtime law provides meaningful relief — but not full exemption.
Being informed about how overtime is taxed in the United States ensures you avoid myths and maximize legitimate tax benefits.
Frequently Asked Questions
Is overtime taxed differently than regular pay?
No. Overtime is taxed under the same federal income tax brackets as regular wages. The United States uses a progressive system, so only income within each bracket range is taxed at that rate. Higher withholding on larger overtime paychecks may create confusion.
What changed with the new overtime tax law?
The new overtime tax law introduced a federal income tax deduction for qualified overtime premium pay beginning in 2025. Eligible workers may subtract the premium portion from taxable income, lowering federal tax liability without eliminating payroll taxes.
Does the overtime tax deduction remove payroll taxes?
No. The overtime tax deduction applies only to federal income tax calculations. Social Security tax at 6.2 percent and Medicare tax at 1.45 percent still apply to all overtime earnings, including both base wages and premium pay.
Why does overtime sometimes reduce my refund?
Overtime increases total annual income, which can raise overall tax liability or reduce eligibility for income-based credits such as the Earned Income Tax Credit. Higher income may also shift withholding accuracy, affecting final refund amounts when filing.
Is overtime taxed more at higher income levels?
Overtime is not taxed at a special rate, but additional income may push part of earnings into a higher marginal bracket. Only income exceeding the bracket threshold is taxed at that higher rate under the progressive federal tax system.
I am Ali Ahmad, a Business Analyst and research based article writer with a Master’s degree in Business and Finance and over five years of professional experience. My work focuses on data driven analysis, market research and international business relations, with strong attention to global economic trends and financial systems. I specialise in analytical content that evaluates corporate strategies, cross border trade, market behaviour and financial decision making, delivering well structured, factual and insight driven articles.
