How is overtime taxed?
What is overtime? Is working overtime worth it? Is overtime taxed more than your regular income? These are the questions that we are going to try and answer in this blog. Starting with the most important and easy to answer of the three. Is overtime pay taxed more?
Despite popular belief, overtime itself is not taxed differently or more than your regular income. However, making more money could mean that you may have to pay more taxes.
Here are the basics on overtime, taxes, and whether overtime has more taxes taken out of it.
What is Considered Overtime?
The definition of overtime is time in addition to what is normal or as time worked beyond one’s scheduled working hours. In the United States, overtime laws vary from state to state, so it’s important to check the laws in your particular jurisdiction.
In general, most workers are entitled to receive overtime pay if they work more than 8 hours a day or more than 40 hours a week.
With overtime hours comes overtime pay. When you work more than your regular hours, you will receive overtime pay – usually 1.5 times your regular salary. Familiarly known as time and a half.
For salaried workers, it’s a bit more complicated. Some salaried workers are exempt from overtime, which means they are not entitled to time and a half.
Is Overtime Taxed Differently?
As stated in the introduction above, overtime pay itself is not taxed differently or more than your regular income. However, making more money due to working overtime could mean that you may have to pay more taxes. Let me explain.
Most employers will be required to withhold the appropriate amount from your gross income, and give that amount directly to the IRS for federal income tax and state tax payments.
If you work a large amount of overtime in a single pay period, your employer might end up withholding a larger amount for taxes compared to what they usually do due to you making more income. Since the only thing that changed was the fact that you worked overtime it may feel like the overtime pay itself is being taxed more, but that isn’t the case.
Withholding tax isn’t calculated differently for overtime pay. The higher withholding tax is due to a higher overall gross income.
To sum it up, your overtime pay is not being taxed differently than your regular wages. Your overall income is being taxed, which may feel like more due to the fact you are making more than usual.
Is Working Overtime Worth It?
So, is working overtime worth it? This is more of a personal decision that you will have to decide for yourself. Working overtime can be a great way to boost your income and reach your financial goals faster, but it requires you spend extra time working. Time you would likely spend with family, doing a hobby, or just relaxing.
By no means should you feel required to put in more hours than necessary, but if you would like to and you have the opportunity to do so, why not. It would be a great way to make more money that can be used to buy yourself something nice, pay off debt, or save for the future. And this is why whether or not working overtime is worth it depends on your situation. There are so many reasons for and against it and it’s up to you to decide what is best.
Now you know what overtime is, if it’s taxed more than regular income and if it’s something you think is worth doing. Was this information helpful? Does this change how you feel about working overtime? Let us know, and if you have any more questions, we’d be happy to help!