Is Overtime Taxed More?

Overtime hours are not taxed more, but they can push you into a higher wage bracket, resulting in higher taxes. For example, if you make $800 a week plus $200 overtime, you get taxed as your salary is $1,000 a week. This is the reason why you get the idea that overtime hours are taxed more.

Taking more hours is the easiest, simplest way to earn some extra income. In the attempt to get debt-free sooner or save for some essentials, like an emergency fund or downpayment on a house, many Americans take on overtime hours.

Since not everyone is well familiar with their personal finance, payday can come with a surprise. So how did a few extra hours increase the total taxes, and what can you do? Read on to better understand the matter.

Overtime Tax And Wage Brackets

Let’s simplify this heavily confusing formula of the progressive tax.

We have John that works as a barista and makes $20 an hour. His manager asks him if he’s free to come on Saturday for an entire 8-hour shift.

Keeping in mind that overtime is paid 1.5 times, John assumes that his Saturday shift will bring him $30 an hour or $240. That’s awesome as the amount will cover his utilities for the month!

His annual salary is $38,400, which places him in a wage bracket where he has 10% tax on the first $9,875 and 12% on the remaining $28,525. After 80 overtime hours in just a few months, he’s jumped into the wage bracket of over $40,125.

He now has taxes amounting to $4,617.5 plus 22% on any amount after $40,125.

John made $2,400 in overtime; the first $1725 leaves him in the same bracket, so it’s taxed 12%; the remaining $675 in the higher bracket, and it’s taxed 22%.

Eventually, John’s overtime hours leave him with $2,044.5. This totals to $25.5 an hour.

Since the overtime put him in a higher wage bracket and he ends up paying less than he assumed, John believes overtime is taxed more and opts not to take on more hours.

Tax Bracket 2021

A young woman is reviewing the tax brackets to see what her total taxes would be on this years salary.

Due to inflation, the IRS adjusts the tax bracket table each year. For 2021 the tax table goes as following:

  • 10% for incomes up to $9,950 ($19,900 for married couples filling jointly)
  • 12% for incomes from $9,951 to $40,525 ($19,900 to $81,050 for married couples filling jointly)
  • 22% for incomes from $40,526 to $86,375 ($81,050 to $172,750 for married couples filling jointly)
  • 24% for incomes from $86,376 to $164,925 ($172,750 to $329,850 for married couples filling jointly)
  • 32% for incomes from $164,926 to $209,425 ($329,850 to $418,850 for married couples filling jointly)
  • 35% for incomes from $209,426 to $523,600 ($418,850 to $628,300 for married couples filing jointly).

Why We Work Overtime

In some cases, overtime is inevitable and beneficial for both the employer and the employee. The common issues that arise the need for overtime work are:

  • Overload of meetings, e-mails that need to get answered promptly;
  • Distractions at the workplace, like maintenance or renovations;
  • Seasonal work increase – seasonal sales, holidays, weekends.

To keep everything running smoothly, employees ask for some overtime.
If you were offered overtime and are considering it, read along to find out all the pros and cons.

Pros Of Working Overtime

1. Saves you time

As silly as it might sound, working extra at the same job saves you time compared to working a second job. You save time on commuting to the second job, and the time you’d spend to learn the new demands of the position. This is convenient when you’re looking for some extra income.

2. It can boost your career

Extra hours can show your ambition and eagerness to help the company. As heroes are proven at hard times, you’d probably get some bonus points for helping keep the work process running smoothly.

3. You earn more money

Overtime is paid 1.5 times, so some extra hours can accumulate to a hefty raise. Of course, this is if you don’t mind working long hours, and your company respects the law.

Cons Of Working Overtime

1. Losing money on taxes

Those few extra hours a week can accumulate to put you in a higher tax bracket. Instead of getting 1.5 times your hourly rate, tax can eat up your earning and leave you with the same or even less than your standard rate. Do your calculations wisely before taking on more hours.

2. Physican and mental exhaustion

Sedimentary work for extended hours hurts your physical health. Some research done by Columbia University over the years shows that sedimentary work’s effects equal those of smoking.

Another research shows that people who work overtime are more likely to suffer from depression and anxiety. They also suffer from more significant work-related stress.

3. Lack of private time

Working overtime is the last resort for people with families. Staying extra hours on your job cuts the quality time spent with your children and partner. If you have to hire a nanny to stay long hours at your job, it’s certainly not a good option.

How To Get Into A Lower Tax Bracket

A calendar on the month of April, representing the last day (15th) to file a US tax return.

If you’re faced with the possibility of jumping into a higher tax bracket, there are some ways you can lower your income and stay in the lower bracket.

Some tax deductions you can use are charity donations, mortgage interest paid on a home loan, and property taxes. These deductions can lower how much of your income will get taxed.

Like earned income tax credit or child tax credit, tax credits can also help you stay in a lower tax bracket. Both provide a dollar-for-dollar decrease in the amount of taxes you owe.

Jobs That Offer Overtime

I faced overtime hours for the first time at 23 – my previous jobs didn’t provide that option. I quickly forgot the few days I worked extra, so I felt like I got a raise when payday came.

Since you’ve learned that overtime is not taxed more, are you looking into jobs that provide extra hours? Here are some that usually do, but keep in mind you have to ask the employer for confirmation.

  • Warehouse Packer – preparing orders for shipment; average hourly rate $12;
  • Driver Merchandiser – delivering products from shipping location to retail stores; average hourly rate $17;
  • Furniture Installer – furniture store employees that deliver and assembling furniture for clients; average hourly rate $16;
  • Registered Nurse – average hourly rate $50;
  • Construction Worker – average hourly rate $16;
  • Tree Climber – average hourly rate $23;
  • Carpenter – average hourly rate $35;
  • Plumber – average hourly rate $45;

FAQs

Is overtime taxed more than regular pay?

No, overtime is not taxed more than regular pay. However, it can put you in a higher tax bracket, so you’d get the impression that it’s taxed more.

Why shouldn’t you work overtime?

If overtime puts you in a higher tax bracket, tires you physically and mentally, it’s not the ideal choice for you. Some companies will not hire extra staff even when it’s really needed; instead, they try to push long hours on their employees as much as possible.

Is it better to have two jobs or work overtime?

Finding a second job with a higher hourly rate and shorter hours can be a better choice. However, a second job means switching locations and losing time in traffic. You’d also have to learn some skills to attend to the requirements of the second job.

How do you calculate overtime?

Take your weekly pay and divide it by 40 if you’re on a full-time basis. That’s your hourly pay. Now multiply your hourly rate by 1.5, and you’d get your overtime hourly pay. Sum up all your overtime hours through the week and multiply them by the overtime rate. That’s your overtime pay for the week!

At what point is overtime not worth it?

When it comes to choosing overtime and extra money over quality time with your friends and family, sacrificing your mental health and wellbeing, overtime is definitely not worth it. And if a couple of hours push you into a higher tax bracket, it’s not a good choice, as most of the earnings will go to taxes.

What’s considered working overtime?

Depending on your contract, whether you’re full-time or part-time, anything above those hours is overtime. For example, if you work 30 hours a week, anything above the 30th hour is overtime.

Bottom Line

When I first accepted working overtime because the company was short on staff during high season, I didn’t think twice. It paid good, and I was young and with enough free time. I wasn’t aware that it could put me in a higher tax bracket.

Luckily the management was reasonable and got enough staff, so no one had to work overtime. So I decided on a second job instead of looking for extra hours as it gave me enough flexibility to make my own schedule.

Calculate wisely if overtime work can put you in a higher tax bracket and if it’s worth your effort. But remember that overtime is not taxed more.

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