Is Overtime Taxed Differently Than Regular Wages?

If you have nonexempt employees, you have to pay them overtime wages whenever they work overtime hours.

In each pay period, you need to track employee time worked. Then, at the end of the pay period, you will calculate employee compensation. You will also have to withhold employment taxes.

As you are doing payroll calculations you might wonder, is overtime taxed differently than regular time?

Is overtime taxed differently?

Taxes on overtime are not different than taxes on regular wages. You will calculate and withhold taxes the same way you do for regular wages.

In fact, you will withhold taxes from the combined total of overtime and regular wages. You do not separately withhold taxes from these two types of compensation.

Example: withholding taxes from overtime wages

For this example, let’s pretend you have an employee named Molly. Molly is a nonexempt employee. She is a full-time employee and earns $11 per hour. You pay her weekly. This week, Molly worked 45 hours.

Before you can withhold taxes, you have to calculate Molly’s total compensation.

First, calculate Molly’s regular wages.

$11 hourly wage × 40 regular hours = $440 regular wages

Next, calculate Molly’s overtime wages.

$11 hourly wage × 1.5 overtime rate = $16.50 overtime rate of pay

$16.50 overtime rate of pay × 5 overtime hours = $82.50 overtime wages

Then, add the regular and overtime wages together.

$82.50 overtime wages + $440 regular wages = $522.50 total wages

You can finally begin subtracting taxes from the wages. (To keep things simple, we’re going to say Molly doesn’t have any pre-tax deductions.)

Let’s start with federal income tax. Molly is single. Using the IRS’s Publication 15-T, you find that you need to withhold $31 from her wages.

Calculate how much is taken out for Social Security and Medicare (FICA taxes), then withhold that amount. The employee portion of FICA taxes is 7.65% of the taxable wages.

$522.50 total wages × 7.65% = $39.97 employee FICA taxes

Remember, you also have to pay the matching employer portion of FICA taxes.

Subtract all taxes from Molly’s wages.

$522.50 total wages – $31 federal income tax – $39.97 FICA taxes = $451.53

After taxes, Molly will take home a net pay of $451.53.

This example only shows what taxes you should withhold at the federal level. Remember to withhold any applicable state and local taxes.

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Wage brackets

The addition of overtime wages can sometimes push an employee into a higher federal income tax bracket. Be careful when calculating federal income tax. You don’t want to assume the employee keeps the same tax bracket during each pay period.

For example, Molly earned $440 without overtime. If this were all Molly earned, you would subtract $21 for federal income tax. But with overtime wages, Molly earned $522.50. The added overtime wages moved Molly up into a higher wage bracket, which means you withhold $31 for federal income tax.

Let Patriot Software handle overtime and tax calculations for you. You simply enter employee information, and we’ll do the rest. Try Patriot’s online payroll software for free!

This article is updated from its original publication date 9/21/2016.

This is not intended as legal advice; for more information, please click here.

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