Are overtime hours more taxed? Here's what you need to know

Tracking overtime for hourly workers can be one of the biggest headaches for small business owners who manage payroll on their own. If you're one of those business owners, you might be wondering: Is overtime taxed more?

It's easy for the overtime tally to get out of control when you're managing a busy team, especially without time tracking tools with overtime alerts to notify you before it's time to make payroll .

So how will those overtime hours affect your payroll taxes?

Here's the short answer: Overtime itself isn't taxed any further. But overtime earnings may push overtime workers into a new tax bracket.

Don't worry, we'll answer your questions about taxes and overtime waivers, so you feel empowered enough to handle your own payroll without having to hire a professional. Let's dive in to learn more about overtime pay, how to calculate taxes with overtime, and overtime tax exemptions.

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Are overtime hours more taxed?

Overtime (which the Department of Labor considers all hours worked outside of a full-time 40-hour week) is not further taxed. When running hourly payroll, you will withhold the same taxes from an employee's overtime pay as you do from their regular pay.

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 on your employee's income.

An employee's overtime earnings, however, can move them into the next tax bracket, in which case the IRS and the state tax a higher percentage of their gross earnings , which includes his combined regular income and overtime.

How are overtime hours taxed?

If you are processing your first pay for an employee who has worked overtime, deduct taxes from the sum of their overtime and regular earnings. So if they earned $1,000 in regular earnings and $300 in overtime, you would add those amounts together and come up with a sum of $1,300.

On payday, here's what you'll keep on that $1,300:

Taxes paid by employees Federal income taxes, which are based on employee earnings and W-4 payroll deductions FICA taxes: 6.2% for Social Security and 1.45% for Medicare Taxes paid by the employer FUTA Taxes (Federal Unemployment Tax Act): 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 a state-provided rate

You can rest easy knowing that there is no specific overtime tax. You will simply withhold the required taxes from an employee's total income for that pay period, which is regular pay plus overtime.

Yes, more overtime can mean more tax deductions, but that's because employees are simply taxed at a higher rate when their overtime earnings kick them into the pay bracket. next imposition.

Overtime tax bands

Since the statutory overtime pay rate is 1.5 times an employee's normal hourly rate, getting your small business's labor costs under control means keeping tabs on overtime expensive. It can also complicate employee taxes if their overtime pushes them into a higher tax bracket.

Let's look at some 2022 annual income tax brackets for single filers to see why this matters:

Taxable income (for the year) Tax due (for the year) Up to but not more than $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% of excess over $41,775

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