How Is Overtime Taxed? Is It Taxed More Than Regular Pay?

Here at Turbo Wallet, we have shared multiple ways to improve your finances. This covers everything from investing and saving money to side hustles to generate additional revenue.

We recently wrote a guide on how to make the most from working overtime. This guide went over considerations you have to make when working overtime. Now, it’s time to look at the financial aspects of doing so.

If you are a worker who does not normally work overtime, you probably have some questions about it. There are many myths about overtime, from how much you should be paid to taxed overtime. Let’s get started! In this article, we will explain some details to solve all your questions.

How To Calculate Your Overtime Payment

To know how much money you will be paid for your overtime work, you must first know what is paid per hour. Doing this calculation is simple enough, with the formula depending on how you are paid. After all, some workers are paid monthly, biweekly, or weekly.

For this guide, we will use an approximation. According to the latest Census analysis of U.S. income, the average income is almost $60,000 per year. We will use this measure to exemplify how to calculate your hourly income.

How To Calculate Your Hourly Income

To know how much money you generate per hour, you must first know some numbers that depend on your job. Specifically, you must know how many days a year and how many hours a day you work.

As we said before, we rely on the Census analysis of U.S. Income. This indicates an average measure of how much Americans work.

How Many Hours Do You Work Each Year?

As you know, the year has 365 days, but you won’t work 365 days a year. According to the Census, the norm is to work 5 days a week, usually Monday through Friday. Therefore, you must remove all weekends from this calculation.

The total number of working days drops from 365 to 280. You should keep in mind that this is an approximate measure. If you work more or fewer days per year, you should consider this when making your calculation.

According to the same census, a U.S. citizen usually works 8 hours a day. This may be different if your contract specifies otherwise. There are some jobs where you only have to work 6 hours a day, and there are others where it is 9 hours a day. We will use the standard measure, which is 8 hours a day, but you make your case.

To find out how many hours a year you work, you must multiply your daily working hours by the number of days a year you work. The calculation you have to do is 8 x 280 = 2,240, the number of hours the average person works a year.

How Much Do You Get Paid Per Hour?

Now that we know the total number of hours you work in a year, we have the essential data to know how much money you generate per hour. To know this, you must divide your annual income by the number of hours you work in a year.

Now, using all of this data, it is just a matter of dividing your yearly income by the number of hours you work each day. You can adapt this to divide your monthly salary by the number of hours you work each month or any other scenario-specific to your job.

In our example, the calculation you should do is as follows: 60,000 / 2,280 = 26.3

The result is that, according to our calculations, the average hourly pay in the United States is $26.

It is important to keep in mind that this is the base rate. To get the exact amount of money you receive for your work, you must calculate taxes and other deductions.

How to Calculate Your Hourly Overtime Income

If you qualify for overtime, a topic we will discuss later on, calculating your hourly overtime income, is mandatory. This process is pretty easy, as the law determines the minimum rate for employees in the country.

This minimum is one and a half times the regular hourly rate paid. This means that if you are paid $10 an hour, your rate for each overtime hour would be $15. Pretty straightforward, right?

Well, there is good news here. Your employer might choose to pay a higher rate for overtime. As such, you need to ask what the rate used by your company is. While many employers might choose not to pay more than the standard rate… Many choose to offer additional perks!

Who Qualifies for Overtime Payment?

Ever since new laws were introduced by the Department of Labour back in January of 2020, more workers qualify for overtime. Every worker who earns less than $684 a week will have to be paid overtime when working more than 40 hours a week.

This means that if you earn more than $684 a week, the equivalent of $35,568 a year), you don’t qualify for overtime. This is because you are considered a “highly compensated employee” at that point. However, your employer might choose to pay overtime even in such circumstances, so make sure to ask!

Finally, depending on the type of work you do, you may be exempt from overtime even if you earn less than $684 a week. According to the Fair Labor Standards Act (FLSA), “Executive, Administrative, Professional, Outside Sales and Computer Employees” are exempt from overtime.

While this definition is vague, it is important to keep it in mind if you consider working overtime. It would help if you always kept in mind that the employer bears the burden of proving you are exempted from receiving overtime pay. This is relevant if a dispute arises as to the result of overtime exemption.

Is Overtime Taxed More Than Regular Working Hours?

Now it’s time to jump straight to the topic of this guide: How is overtime taxed? If you have already looked for information on this topic, you might have found it difficult to find reliable information. Well, the answer to this question is surprisingly simple: Overtime is taxed just like your regular working hours.

Whether you agree or disagree on the fairness of such a taxation method, the fact that you must pay taxes remains unchanged. This doesn’t mean that you are not earning additional money with overtime. You will certainly see an increase in your income when doing so.

The difference between the hourly rates that confuses people the most about how overtime is taxed. While the percentage you pay in taxes is the same, it might seem higher. This is simple math: You are earning more per hour, and as such, the amount you pay is higher despite the percentage is the same. It is just a matter of perception.

This is good news, as it makes the taxing calculations extremely easy. Just add the income from your overtime pay to your gross pay and do the standard calculation for your income. That’s it! As the rate is the same, you don’t have to overcomplicate yourself.

However, it would help if you remembered that the income from your overtime could push you into the next taxing band. This is something you should always be mindful of as there is a chance it has a negative impact. Make sure to do your calculations beforehand!

Why Should You Pay Overtime Taxes?

Considering that you have to work overtime, it may seem unfair how overtime is taxed. We understand this feeling. However, there is a point to charging taxes, as it is just additional income.

Taxing overtime is also a means to prevent some bosses from abusing this benefit for the worker. Keep in mind that you are not only being charged for overtime; the company is paying taxes too.

If overtime taxes did not exist, an employer could offer a very low salary with a very high overtime payment. This would cause an employer to make it mandatory for his employee to work overtime to have a living wage. But because overtime is taxed, these situations are avoided in the employee’s best interest.

So, while it may seem unfair how overtime is taxed, the reality is that it is the way that best protects the interests of the worker. No taxing overtime will result in both workers and employers manipulating overtime hours… Don’t believe us? This was the result of a French experiment back in 2007.

Conclusion

As you can see, the answer to the question “how is overtime taxed?” is pretty straightforward. However, understanding why it works that way and how to choose to do it or not can be more challenging.

By truly understanding how overtime is taxed and its implications, you can now make an informed decision. Is it better to work overtime to pay for an unexpected expense, or maybe should you use a credit card? What about getting a side hustle? Whatever you choose, the important thing to keep in mind is always to do your homework and research.

If you want to learn more about how to make the best out of overtime, we recommend you check our guide!