Is Overtime Pay Taxable? What Hourly Workers Need to Know for Their Paycheck
My son is a registered nurse. He recently picked up extra hours with an incentive bonus in addition to overtime pay. When his paycheck arrived, he was frustrated. “I got taxed more for working overtime,” he said. Having worked in tax for years, I had to explain: it only seemed that way.
Overtime earnings can trigger higher tax withholding on a single paycheck, especially when that check is larger than normal. That's because payroll systems often “annualize” each paycheck; temporarily treating it as if you earn that much every pay period. If the system thinks you're in a higher tax bracket, it withholds more. But rest assured: your actual tax rate is determined at year's end, based on total income.
How Overtime Pay Is Taxed
Yes, overtime pay is fully taxable under current law. That includes:
- Federal income tax
- State income tax (if your state has one)
- FICA taxes (Social Security and Medicare)
Overtime pay has been treated the same as regular wages when it comes to taxes. However, the One Big Beautiful Bill that passed in July 2025 has resulted in changes that will allow qualified overtime compensation to be deducted. As the season draws closer we will learn more about how the Trump Administration and IRS intend to execute this.
Why Your Overtime Paycheck Looks Smaller Than Expected
If your check looks smaller, it's often due to higher withholding and not a different tax rate. Bonuses, incentive pay, and overtime are lumped together and taxed as supplemental income, which can trigger higher withholding temporarily.
Is There Really a Push to Make Overtime Non-Taxable?
Yes. Some lawmakers are proposing legislation to make overtime pay exempt from federal income taxes. Alabama has taken the lead, enacting a temporary stay on state taxes for overtime pay, a move seen as part of a national trend. As mentioned previously, the One Big Beautiful Bill that passed recently will take an effect tax on overtime starting in the coming tax season TY2025.
Since this has become federal law, it could mean larger take-home pay for hourly workers, especially in fields like manufacturing, retail, hospitality, and healthcare. For employers, it may help attract and retain workers amid ongoing labor shortages.
Why This Matters to Hourly Workers
Hourly jobs often represent underserved and underpaid segments of the workforce. Removing taxes from overtime could give workers more real value for their time. In healthcare especially, incentives for additional shifts could ease strain on the system and improve care quality.
When it’s time to file your taxes, up-to-date online platforms like FileYourTaxes.com will automatically apply new tax laws including any overtime tax changes so you can file with confidence.
U.S. State Tax Authority Links (Check State Tax Rules)
FAQ: Overtime Pay and Taxes
Q1: Is overtime pay taxed differently than regular wages?
A:Yes. Per the IRS, “Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay…
Q2: Why does my overtime paycheck look smaller?
A: It may have higher withholding because your paycheck was temporarily treated as if you earn that amount regularly.
Q3: Will I owe more taxes because of overtime?
A: Not necessarily. Your total tax due depends on your total annual income, not one paycheck.
Q4: Is overtime tax-free in any state?
A: Alabama has temporarily exempted overtime pay from state taxes. Most other states still tax it.
Q5: What if the federal government passes an overtime tax exemption?
A: Online platforms like FileYourTaxes.com will apply updated laws automatically when you file.
