Overtime Tax Rates and the Realities of Overtime Pay

Overtime Tax Rates and the Realities of Overtime Pay

Understanding the impact of overtime in a rapidly changing economy
Overtime Tax Rates

The cost of living in America is soaring, and the effects are being felt by everyone. 

As inflation rates climb, reaching 3.3% in May, consumer prices are following suit, rising 3.4% over the past year according to the Consumer Price Index. This sharp increase in living expenses is outpacing wage growth, leaving many Americans struggling to make ends meet. 

To cope with these financial pressures, many workers are opting to work more, accruing more and more overtime hours; however, the additional income that accompanies these extra efforts comes with its own set of challenges. 

This article delves into the complexities of overtime work, examining its impact on workers’ well-beings, the tax implications, state-specific regulations, and the tools available to manage overtime effectively. 

Cue up the cowbell because, as Bachman Turner Overdrive said so eloquently, it’s time to examine how and why more workers are taking care of business by working overtime. 

Regular Pay vs. Overtime Pay

Let’s start our study by defining both regular and overtime pay. 

Regular pay refers to the compensation an employee receives for his or her standard working hours. This is the base pay rate an employee earns for hours worked. A regular rate of pay can be determined by various factors, such as hourly rate, salary, piece rate, or commission. The Fair Labor Standards Act (FLSA) requires that U.S. employees be compensated at the federal minimum wage for all hours worked as regular pay. 

Unless exempt, employees covered by the FLSA must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and a half of their regular rates of pay. 

In terms of maximum working hours, the FLSA does not limit the number of hours employees aged 16 and older may work in any workweek.

Overtime pay is additional compensation an employee receives for working hours in excess of those completed in a standard workweek. In the U.S., the FLSA mandates that nonexempt employees receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and a half of their regular pay. 

Overtime laws vary by state, and employers must be well-versed in local regulations to ensure proper compensation and compliance. Failure to do so can lead to U.S. Department of Labor (DOL) investigations and potential lawsuits from employees. 

It is important to note that exemptions do exist. For example, while most states follow the 40-hour rule outlined in the FLSA, two states offer different provisions: Kansas (46 hours) and Minnesota (48 hours). In Alabama, overtime pay received by a full-time hourly employee is excluded from gross income and exempt from state income tax. 

Some states, including Alaska, California, Colorado, Florida, Nevada, and Oregon, have daily overtime laws. In these states, employers are required to pay overtime rates once an employee works beyond a certain number of hours per day. A full list of each state’s overtime rules can be found by clicking here. 

Tip: Use a time clock to track work hours. Tracking time ensures employees are paid appropriately for all regular and overtime hours.

Taxation of Overtime Pay

Overtime pay is taxed at the same rate as regular pay; there is no special tax rate for overtime pay. 

Of course, overtime pay is still income; thus, it is subject to income taxes, much like regular pay. However, because overtime pay is generally higher, it may result in higher tax withholdings. 

Social Security and Medicare taxes, often identified as Federal Insurance Contributions Act (FICA) taxes,  are among the most common withholdings. The combined rate for these taxes is typically 7.65% for employees (6.2% for Social Security up to a specific base limit and 1.45% for Medicare). Overtime wages are also applicable to state unemployment insurance and federal unemployment taxes, though employers typically cover these costs. 

Example Calculation

Let’s look at the tax calculations for an employee who earns $30 an hour who’s worked 45 hours in a workweek.

Regular Pay: $30/hour for 40 hours = $1,200

Overtime Pay: $45/hour for 5 hours = $225

Total Weekly Pay: $1,200 + $225 = $1,425

Assuming a federal income tax rate of 10%, FICA tax rate of 7.65%, and state income tax rate of 5%:

Federal Income Tax Withholding: 10% of $1,425 = $142.50

FICA Taxes: 7.65% of $1,425 = $109.01

State Income Tax Withholding: 5% of $1,425 = $71.25

Net Pay Calculation:

Total Withholding: $142.50 (Federal) + $109.01 (FICA) + $71.25 (State) = $322.76

Net Pay: $1,425 - $322.76 = $1,102.24

Tax Brackets and Higher Earnings

The Notorious B.I.G. famously said, “More money, more problems” (in a less grammatically correct way). While that proverbial statement is somewhat subjective, the government generally assures the more money one makes, the more he or she will pay in taxes. 

In the U.S., employees pay taxes as a percentage of their income in layers called tax brackets. As your income goes up, the tax rate on the next layer of income is higher. Below is a table showcasing the 2023 tax rates for a single taxpayer. 

2023 Tax Rates for a Single Taxpayer

Tax Rate On Taxable Income from Up to
10% $0 $11,000
12% $11,001 $44,725
22% $44,726 $95,375
24% $95,376 $182,100
32% $182,101 $231,250
35% $231,251 $578,125
37% $578,126 And up

To view the current federal income tax rates and brackets for those married filing jointly, married filing separately, and heads of households, click here. 

Exemptions from Overtime Pay

Overtime laws and some other wage and workplace protections, like meal and rest break laws, do not apply to “exempt” employees. Exempt employees are not eligible for overtime pay, even if they work more than eight hours a day or 40 hours a week. These exemptions can be based on job type, industry, or specific criteria set by state laws.

Here are some key FLSA exemptions:

Executive, Administrative, and Professional Employees: The FLSA provides an exemption from both minimum wage and overtime pay for workers employed as bona fide executive, administrative, professional, and outside sales employees. Starting July 1, 2024, salaried “white collar” workers earning less than $43,888 will be eligible for overtime pay. The ruling is designed to “expand overtime protections for millions of the nation’s lower-paid salaried workers,” stated a White House press release. 

Highly Compensated Employees: Employees who meet certain salary criteria may be exempt from overtime pay. The FLSA sets a total annual compensation threshold for these employees.

Computer Employees: Computer professionals who are employed in specific roles, such as computer systems analysts, computer programmers, or software engineers, may be exempt from overtime pay if they receive a salary above a certain level. 

Agricultural Workers: Agricultural workers employed on small farms may be exempt from both the minimum wage and overtime pay provisions of the FLSA.

Other Exemptions: There are additional exemptions for certain occupations, such as drivers, drivers’ helpers, loaders, mechanics employed by motor carriers, employees of seasonal and recreational establishments, and more.

Time-and-a-Half Pay vs. Double-Time Pay

Time-and-a-half pay is the minimum overtime rate regulated by the FLSA for all hours worked beyond 40. This stipend is the equivalent of a 50% increase in pay. 

To calculate time-and-a-half pay, multiply the regular pay rate by 1.5. 

Double time is the equivalent of paying employees twice their regular pay. For example, if you earn $20 per hour, double time is $40 per hour. Employers are not required to pay employees double time in most jurisdictions, but exceptions do exist. In California, employers must pay double time to employees who work more than 12 hours in a day and for hours worked that exceed eight on a seventh consecutive day of work. 

To calculate double pay, multiply the regular pay rate by two. 

Tools for Tracking Overtime

Tracking overtime for hourly workers can be one of the biggest headaches for small business owners managing payroll on their own. 

This is evidenced via a 2021 survey conducted by ADP, which states that North American workers are working an average of nine hours of unpaid overtime every week — the equivalent of $17,726 a year in stolen income ($35,451 for a two-worker household) at the full-time median wage.

A time tracking system, such as OnTheClock, can help expedite the process, eliminating errors and making payroll more accurate and efficient. OnTheClock offers employees and employers numerous benefits, including:

Automated Calculations: OnTheClock automatically calculates overtime based on a company’s defined rules, policies, and locations. This eliminates manual calculations and reduces the risk of errors, ensuring employees are accurately compensated for their extra time. 

Customizable Overtime Rules: Managers may set specific overtime rules, including daily and weekly overtime thresholds, double-time rules, and unique overtime rates. This allows companies to customize the software to align with their unique requirements and compliance standards. 

Overtime Alerts: Alerts can be set to notify employees and managers if and when an employee approaches the overtime threshold, helping the company to control labor costs and avoid unexpected overtime expenses. 

Overtime Reports: Managers can generate reports detailing the overtime hours worked by each employee. These reports can be customized to show daily, weekly, or monthly data, helping managers analyze overtime trends and make informed decisions. 

Mobile Access: Employees (and managers) have access to employee timecards at all times, fostering transparency and accountability. This open approach helps everyone see where employees’ hours are at and facilitates proper time management conveniently. 

Payroll Integration: OnTheClock seamlessly integrates with various payroll systems, ensuring the payroll process is completed quickly and accurately, regardless of a company's size or scope. 

Historical Data: Records are stored for years, allowing managers to utilize data to analyze past records and inform future decisions. 


Navigating the impact of overtime pay and understanding its intricacies is essential for both employees and employers. 

Here, we’ve explored the differences between regular and overtime pay, the tax implications of working extra hours, and the various state-specific regulations that can affect compensation. We've also discussed the importance of compliance with the FLSA and provided practical solutions for tracking and managing overtime. 

As the cost of living continues to rise, it is crucial for workers to be aware of their rights and for employers to ensure fair and accurate compensation practices. Incorporating OnTheClock into your business is an exceptional way to manage the financial and personal impacts of overtime work with minimal effort. Download OnTheClock today to unearth the virtues of time tracking. Join the ranks of 157,000 individuals who utilize the software each and every day to maximize their productivity. 

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Written by

Herb Woerpel

Herb Woerpel is a copywriter with OnTheClock. He has 17-plus years of professional journalism experience working for community and national media outlets.

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