Overtime & taxes (2026) | PaycheckByState

Is overtime taxed more? No. Overtime is ordinary income taxed at the same brackets as the rest of your pay. A big overtime check can look more heavily taxed because withholding assumes the larger amount repeats all year, but your actual tax is settled when you file and any over-withholding is refunded.

Is overtime taxed at a higher rate?

No. There is no special overtime tax rate. Overtime pay is ordinary income, taxed at the same brackets as the rest of your pay. What people notice is that overtime withholding can look heavy — and that any extra earnings are taxed at your top marginal rate rather than your average rate.

Payroll software annualizes each paycheck. If one check is unusually large because of overtime, withholding treats it as if you earn that amount every period, pushing more of it into higher brackets for that check. Over the whole year the tax is calculated correctly on your return, and any over-withholding comes back as a refund.

Federal overtime rules

Under the Fair Labor Standards Act, non-exempt employees must receive at least 1.5 times their regular rate for hours worked over 40 in a workweek. Exempt employees — typically salaried executives, administrative and professional workers who meet salary and duties tests — are not entitled to overtime. Some states set stricter rules.

How overtime is withheld

Overtime is usually included with regular wages and withheld using the same percentage method as any paycheck. Social Security (6.2%) and Medicare (1.45%) apply to every overtime dollar. Unlike bonuses, overtime is normally not treated as a separate "supplemental" payment when paid with regular wages.

The new overtime deduction (tax years 2025–2028)

Under the One, Big, Beautiful Bill Act, employees may deduct qualified overtime compensation — the amount that exceeds their regular rate (the "half" in time-and-a-half) — up to $12,500 per return ($25,000 for joint filers). The deduction phases down when modified adjusted gross income exceeds $150,000 ($300,000 joint). It applies for tax years 2025 through 2028, and beginning in 2026 employers report qualified overtime in Box 12 of Form W-2 with code TT.

It is a deduction claimed on your return, not a tax rate change, so standard paycheck withholding does not fall automatically. The IRS says employers may reduce withholding only if you submit an updated Form W-4 that accounts for the expected deduction. Federal overtime is still subject to Social Security and Medicare, and state rules vary.

State overtime rules

Several states go beyond the federal weekly rule with daily overtime. California requires overtime after 8 hours in a day and double time after 12; Alaska after 8 hours a day; Colorado after 12 hours a day; Nevada after 8 hours in a day for many employees. Others, such as Minnesota, set the weekly threshold above 40 hours for some workers. See the minimum wage and pay rules section of each state page.

How much you keep: a $20-per-hour worker

A single filer earning $20 an hour for 40 hours a week, plus overtime at $30 an hour. The last column shows the share of extra overtime pay kept after federal and FICA taxes (and state tax in California).

Overtime / week	Texas: take-home / year	Kept from OT	California: take-home / year	Kept from OT
0 hours	$35,606	—	$34,418	—
5 hours	$41,873	80.4%	$40,227	74.5%
10 hours	$48,140	80.3%	$45,925	73.8%
15 hours	$54,408	80.4%	$51,588	73.4%

Enter your own rate and overtime hours in the paycheck calculator (choose "Hourly").

Frequently asked questions

Is overtime taxed at a higher rate?

No. Overtime is taxed as ordinary income at your normal brackets. It can look larger-taxed on a single paycheck because withholding assumes that higher pay will last all year.

What is the federal overtime rate?

Non-exempt employees must be paid at least one and a half times their regular rate for hours over 40 in a workweek.

Can I deduct overtime pay?

For tax years 2025–2028 you may deduct up to $12,500 ($25,000 on a joint return) of qualified overtime — the "half" of time-and-a-half — subject to income limits. It is claimed on your return.

Will my employer withhold less because of the overtime deduction?

Only if you give your employer an updated W-4 that accounts for the expected deduction.