How to Calculate the Taxes on Overtime

Employers are not required to pay overtime pay to executives, managers, and most supervisors.
Employers are not required to pay overtime pay to executives, managers, and most supervisors. (Image: Steve Cole/Photodisc/Getty Images)

U.S. law requires employers to pay overtime pay to qualified workers who work more than 40 hours in a workweek. The overtime pay rate is one and one-half times the employee’s regular pay rate. Overtime pay is taxed in the same manner as regular wages.

Calculate federal income tax withholding. Consult Lines 3 and 5 of the employee’s W-4 form for her filing status and allowances and use IRS Circular E’s withholding tax tables to figure the withholding amount. The Circular E gives you the withholding amount based on the employee's allowances, filing status, pay period and earnings.

Suppose the employee earns $400 in regular wages for the week and $110 in overtime earnings. Her total earnings for the week are $510, which is the amount on which taxes are calculated. She claims single with one allowance on her W-4. Circular E offers several ways of calculating the amount to be withheld. The two most popular methods are the wage bracket method and the percentage method.

Calculate federal tax withholding using the tax bracket method. Navigate to page 45 of Circular E, which is the beginning of the tax bracket tables. Page 45 contains the table for single employees. Find the appropriate wage bracket in the left-hand column - at least $510, but less than $520 - and then select the withholding amount from the column for one allowance. The withholding tax on this amount is $51.

Employ an alternate method, the percentage method, for a more precise withholding amount. The withholding allowance table on page 41 of Circular E indicates that the employee's one withholding allowance is $76 for a weekly pay period. Subtract this figure from her total pay of $510, which results in a taxable weekly pay of $434. Navigate to page 43 and use the chart for single people. The taxable amount is in the chart's second range, from $218 to $753. The chart's instructions are to add $17.50 to 15 percent of the difference between her taxable pay and $218, or $434 - $218 = $216. Thus: $216 x 15% = $32.40; $32.40+$17.50 = $49.90. The amount to withhold using the percentage method is $49.90

Compute Social Security tax at 6.2 percent of gross income and Medicare tax at 1.45 percent.

Apply your state revenue agency’s income tax withholding method to calculate state income tax withholding. Most states require employers to use the employee’s state withholding form and the state withholding tax table--similar to the federal income tax withholding process--to figure state income tax. Still, check with your state revenue agency for guidelines, because some states use a different system. For example, Pennsylvania charges a flat withholding tax of 3.07 percent for 2009 state income tax withholding.

Tips & Warnings

  • The employer should pay overtime hours with the employee’s next regularly scheduled paycheck. Most employers pay overtime on the same check as the employee’s regular wages. If the employee has many overtime hours, the employer can choose to pay it on a separate check. This gives the employee a tax break; the taxable wages are less than if the overtime was added to regular wages.
  • Note that overtime pay is required only when work hours in the week exceed 40 hours. A worker who works 9 hours a day for 4 days in a week that contains a paid holiday would generally be paid 44 hours at straight time - 36 hours of work time and 8 hours of holiday pay. Instead of the 40-hour rule, some employers pay overtime for work after the 8th hour in a day.

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