Working Overtime and Taxes
The Fair Labor Standards Act (FLSA) regulates federal overtime laws; the state labor department administers state overtime policies. Overtime wages are taxable earnings and are therefore subject to federal and state tax withholding. The Internal Revenue Service regulates federal withholding laws; the state taxation/revenue agency administers state withholding laws.
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Overtime Criteria
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Under the FLSA, a nonexempt employee is entitled to overtime pay for work hours exceeding 40 for the workweek. State law may agree or differ from federal law. For example, California nonexempt employees are entitled to overtime pay for work hours exceeding eight for the day (up to 12 hours) and for hours worked on the seventh straight day of the workweek. The employer applies the law that gives the employee the most pay. It compensates overtime hours at 1.5 times the employee's regular pay rate. The employer should examine the FLSA and the state's criteria for exemption from overtime. For example, under the FLSA, administrative, professional and executive employees (as defined by the act) are exempt from overtime.
Required Taxes
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The Internal Revenue Service considers overtime wages as supplemental income --- wages paid in addition to regular earnings. Overtime wages are subject to the same income tax as regular wages: federal income tax, Social Security tax, Medicare tax and, if applicable, state income tax, state disability insurance and city and/or local income tax.
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Tax Calculations
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Federal income tax withholding depends on the employee's filing status, income, allowances and the IRS withholding tax tables. The employer calculates Social Security tax at 4.2 percent (for 2011), up to $106,800 for the year; and Medicare tax at 1.45 percent. It calculates state, city and local income tax and state disability withholding according to the respective revenue agency's guidelines. When the employer pays overtime with regular wages, it increases the employee's taxable income. If the overtime wages are substantial, the employer can pay it as a separate check to reduce tax withholding.
Payment Time Frame
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In general, overtime wages are due with the employee's regular wages on her next regularly scheduled payday. State law may dictate when overtime wages are due. For example, in California, the employer pays overtime no later than the payroll period following the pay period after the overtime wages were earned. The employer can only delay overtime wages until the following payday, but must pay regular hours by the next regularly scheduled payday.
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