Is overtime taxed more? Here’s what you need to know

Tracking overtime for hourly employees can be one of the biggest headaches for small business owners who handle payroll themselves. If you’re one of those business owners, you might be wondering: Is overtime taxed more?

Counting overtime hours is easy to get out of hand as you manage a busy team, especially without a time tracking tool with overtime alerts to alert you before it’s time to pay.

So, how will those overtime hours affect your payroll taxes?

Here’s the short answer: overtime itself isn’t more taxing. But overtime earnings can push overtime workers into a new tax bracket.

Don’t worry — we’re going to answer your questions about overtime taxes and deductions, so you feel empowered enough to run your own payroll without going to a professional. Let’s dive in to learn more about overtime pay, calculating taxes with overtime, and overtime tax deductions.

Is overtime taxed more?

Overtime hours – which Labor Department Any hours worked outside of a full-time, 40-hour week — are not taxed in excess. time to run Hourly payYou will withhold the same tax from an employee’s overtime wages as from their regular wages.

You don’t have to do two separate calculations when withholding federal, state, and FICA (Federal Insurance Contributions Act, i.e., Social Security and Medicare) taxes from your employee’s earnings.

An employee’s overtime earnings may push them into the next tax bracket, however, in which case the IRS and state tax a larger percentage of them. gross incomewhich is included in their combined regular and overtime earnings.

How is overtime taxed?

if you Your first paycheck is ongoing For an employee who worked overtime, deduct tax from the sum of their overtime and regular earnings. So, if they make $1,000 in regular earnings and $300 in overtime earnings, you add those amounts together and come up with a total of $1,300.

On payday, here’s what you’ll withhold from that $1,300:

Employee-paid taxes

  • Federal income taxwhich is based on employee earnings and W-4 withholding allowances
  • FICA Tax: 6.2% for Social Security and 1.45% for Medicare.

Employer-paid taxes

  • FUTA (Federal Unemployment Tax Act) Tax: An employer pays a 6.0% tax on the first $7,000 of employee earnings
  • SUI (State Unemployment Insurance): An employer pays a tax based on the rate provided by the state

You can rest easy knowing there is no fixed overtime tax. You only withhold the required tax from an employee’s gross income for that pay period, which is regular and overtime earnings.

Yes, more overtime work can mean more tax withheld, but that’s because employees are taxed at a higher rate when their overtime earnings move them into the next tax bracket.

Overtime tax bracket

Because the legal overtime rate of pay is 1.5 times an employee’s regular hourly rate, your small business is on top of that. Labor cost That means keeping track of costly overtime hours. This can complicate employee taxes if their overtime hours push them into a higher tax bracket.

Check out some 2022 annual income tax brackets for single filers to see why this is important:

Taxable Income (for the year) Tax Due (for the year)
up to but not exceeding $10,275 10% of taxable income
More than $10,275 but not more than $41,775 $1,027.50 + 12% of excess over $10,275
More than $41,774 but not more than $89,074 $4,807.50 + 22% additional over $41,775

Here’s where it gets complicated: If an employee earns $800 per week in 2022, you’ll need to withhold taxes based on the second tax bracket on this chart.

But if they work overtime hours a week in July and earn $1,000, that pushes them into the third bracket. That means more federal income tax will be withheld from their paychecks that week than you normally would.

How is overtime tax calculated?

No specifics though ‘Overtime Tax,’ You must calculate tax for overtime just as you would for regular tax.

Calculate your employee’s overtime tax

when ongoing salary, tax your employee’s overtime wages along with their regular wages. Let’s look at how you calculate FITW (Federal Income Tax Withholdings) using an example employee, Joaquin, who will pretend to pay you weekly.

  1. Find out the total taxable income of your employee. Joaquin earns $18 an hour and works 40 hours a week, so he earns $720 in regular wages.
    But Joaquin also worked an additional 7 hours of overtime this week. So, according to the Fair Labor Standards Act, you must pay him one and a half times his hourly wage, or 1.5 times, for each overtime hour. Joaquin’s overtime rate is $27 per hour, and he earned $189 in overtime wages.
    Add the regular pay and overtime pay together to determine what Joaquin’s taxable income is:
    $720 (Regular Income) + $189 (Overtime Earnings) = $909 (Total Taxable Income)
  2. Determine your employee’s filing status. Use Joaquin’s Form W-4 to determine if he has any dependents. Its filing status is identified as ‘single,’ And he did not indicate any other detention. This means he will have more FITW taken out of his paycheck than other employees filing jointly and/or dependents.
  3. Use the IRS’s Wage Bracket Method table Publication 15 To calculate your employee’s income tax withholding. Go to page 11 for The ‘Wage Bracket Procedure Table for Manual Payroll Systems with Form W-4 in 2020 or Later.’ Use the worksheet, or scroll through the weekly pay period table until you find Joaquin’s wage bracket for that week. Because he earned $909 that week, and because he has standard withholding status as a single filer, you would withhold a standard deduction of $75 from income taxes for Joaquin.

Payroll taxes can be done manually, but calculating income tax withholding for each employee takes time. That’s why we recommend using an automatic paymaster Software like Homebase to avoid tax liability and make this process quick, easy and error free.

Are there any exemptions to the overtime tax law?

Knowing if your employees are exempt from overtime tax laws means finding out if they are exempt from overtime pay. According to FLSA (Fair Labor Standards Act), employees are exempt from overtime pay if they meet these requirements:

  • You pay them on salary basis: You pay an employee an annual salary rather than an hourly rate.
  • You pay them the federal minimum weekly requirement. As of January 2020, employees are not entitled to overtime pay if their employer pays them at least $684 a week.
  • Employee duties pass the duty test for exempt white-collar workers. Employers do not have to pay overtime if their employees’ job descriptions pass the executive, administrative and professional employee responsibilities test. For example, outline the FLSA Primary Responsibilities of Professional Staff As one that is involved “Invention, imagination, originality, or genius in a recognized field of artistic or creative endeavor.”

Visit Homebase State Labor Law Hub Learn more about your state’s requirements for exempt and non-exempt employees from overtime pay.

How Homebase can automate your payroll taxes

As a small business owner tracking time manually and running your own payroll, it’s not just taxes that worry you about overtime — it’s also payroll compliance. You want to make sure you’re doing everything you can to follow your local labor guidelines for overtime.

Homebase is free Fixed timer clock The tool automatically clocks out and closes your plate with alerts notifying you when workers are approaching overtime.

You can also use it to set up break and overtime rules that will keep you in compliance with federal, state and local labor laws as well as FLSA regulations.

Last but not least, Homebase’s HR Tools And Salary Features Includes an extensive library of resources, guides, templates, and automation to help you get started so you don’t have to be your own HR expert when payday approaches.

Overtime Tax FAQs

Why is overtime taxed?

Overtime is taxed because the IRS still considers it part of an employee’s income. Although no special overtime tax exists, you must still withhold federal income and FICA taxes from an employee’s overtime wages.

Is overtime taxed differently than regular time?

Overtime is not taxed separately from regular wages. Overtime wages, however, can increase an employee’s gross pay enough that they move into a higher tax bracket. For example, if an employee who normally earns $800 per week works enough overtime to earn $1,000 in a week, you will have to withhold more federal income tax than you would normally make that week.

What are the tax brackets for 2022?

Below are the annual federal income tax brackets for 2022 according to the IRS Publication 15 – t. Note that these tax brackets are for standard withholding and not for employees who checked the box in Step 2 of Form W-4:

Married filing jointly
at least- But less than- The provisional amount withheld is- Plus this percentage- Amount of adjusted annual wages or payments—
$0 $13,000 $0.00 $0.00 0% $0
$13,000 $33,550 $0.00 10% $13,000
$33,550 $96,550 $2,055.00 12% $33,550
$96,550 $191,150 $9,615.00 22% $96,550
$191,150 $$353,100 $30,427.00 24% $191,150
$353,100 $444,900 $69,295.00 32% $353,100
$444,900 $660,850 $98,671.00 35% $444,900
$660,850 $174,253.50 37% $660,850
Single or married filing separately
at least- But less than- The provisional amount withheld is- Plus this percentage- Amount of adjusted annual wages or payments—
$0 $4,350 $0.00 0% $0
$4,350 $14,625 $0.00 10% $4,350
$14,625 $46,125 $1,027.50 12% $14,625
$46,125 $93,425 $4,807.50 22% $46,125
$93,425 $174,400 $15,213.50 24% $93,425
$174,400 $220,300 $34,647.50 32% $174,400
$220,300 $544,250 $49,335.50 35% $220,300
$544,250 $162,718.00 37% $544,250
the head of the family
at least- But less than- The provisional amount withheld is- Plus this percentage- Amount of adjusted annual wages or payments—
$0 $10,800 $0.00 0% $0
$10,800 $25,450 $0.00 10% $10,800
$25,450 $66,700 $1,465.00 12% $25,450
$66,700 $99,850 $6,415.00 22% $66,700
$99,850 $180,850 $13,708.00 24% $99,850
$180,850 $226,750 $33,148.00 32% $180,850
$226,750 $550,700 $47,836.00 35% $226,750
$550,700 $161,218.50 37% $550,700

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