Quick answer: Overtime is taxed the same as regular wages. There’s no higher tax rate — the same federal income tax rules and FICA rates apply to every dollar earned, following IRS guidance in Publication 15 and Topic 751.
Many hourly team members think overtime is “taxed more” because their paycheck shows higher withholding during busy weeks. But that’s temporary. Payroll systems project annual income based on that bigger check, which increases withholding for that pay period only. Understanding these rules — and your obligations under federal and state HR compliance — helps you explain overtime clearly and stay confident in your payroll process.
How Does Tax Withholding Work on Overtime Pay?
Overtime tax withholding uses the same calculation methods and rates as regular wages for retail and restaurant owners.
What really matters for your business: Your payroll system combines regular and overtime wages into total gross pay. Then it applies your team member's W-4 elections to determine federal income tax withholding. Filing status, dependents, and additional withholding—all factor in. There's no separate or special calculation for the overtime portion.
FICA taxes work identically too:
- 6.2% Social Security tax applies up to the 2025 wage base of $176,100.
- 1.45% Medicare tax applies to all wages with no caps.
- No distinction between regular and overtime hours for either tax.
- Your servers earning time-and-a-half on busy weekend shifts have the same rates applied whether they're working their 35th hour or their 50th hour.
These rates stay consistent regardless of how many hours your hourly teams work.
Here’s a real-life example: Your shift lead earns $22/hour regular time and works 45 hours. That's 40 regular hours plus 5 overtime hours at $33/hour. The payroll system calculates withholding on the total $1,045 gross pay using standard IRS withholding tables. It doesn't create separate calculations for the $880 regular portion and $165 overtime portion.
Why Does Overtime Pay Look Different on Paychecks?
Team member confusion typically starts with this question, and for good reason: paychecks with overtime often show higher withholding percentages, but this doesn't mean overtime is "taxed more."
In reality, this is what really happens with those paychecks:
- Your restaurant server works extra shifts during a busy week.
- They earn $950 instead of their usual $720.
- The payroll system annualizes this amount across all pay periods.
- It projects annual income at $950 × 52 weeks = $49,400.
- Their typical annual income would be only $37,440.
- This temporary projection causes higher withholding for that specific paycheck.
- The system isn't taxing overtime more—it's projecting higher total annual income.
Your team member sees extra withholding and thinks overtime is “taxed more,” but it’s just a temporary bump. Payroll assumes that higher check happens every week, so it withholds a bit more. Their actual earnings are lower, so they get the extra back at tax time.
The extra withholding gets refunded when they file their tax return. Their actual annual earnings won't match the annualized projection. They'll receive a refund for the temporary overwithholding when they file their yearly tax return, typically within 21 days for e-filed returns with direct deposit.
This is why it's crucial to explain to your hourly teams that working overtime always increases their take-home pay, even after taxes. Higher withholding may appear on their paychecks during overtime weeks, but any over-withholding gets refunded when they file their tax return.
What Do Employers Need to Track for Overtime Taxes?
You don’t need a separate system for overtime. You track it the same way you track regular hours, with no extra recordkeeping required.
Federal recordkeeping requirements protect both you and your hourly teams:
- IRS mandates: Keep employment tax records for at least 4 years, including all wage payments (combining regular and overtime), federal income tax withheld, and copies of team member W-4 forms
- DOL requirements: The FLSA requirements mandate 3-year records of hours worked each day, total overtime earnings per workweek, and the basis of wage payment (such as hourly rate or salary), along with team member identification, work time records, and all wage deductions
- Tip tracking: Document tips accurately since they count toward the regular rate of pay when calculating overtime compensation for restaurant staff
These requirements apply equally to regular and overtime wages. There's no additional compliance burden for overtime specifically.
For restaurant owners managing tipped hourly teams: Don't forget that tip reporting integrates with overtime calculations. Tips count toward the regular rate of pay when calculating overtime compensation under the FLSA. Maintain accurate tip records alongside your standard payroll documentation. This ensures correct overtime calculations and compliance.
Compliance issues usually come from payroll basics, like missed deposit deadlines or incorrect income tax calculations, not from overtime itself. Overtime and regular wages are reported together on quarterly payroll filings, including Form 941, where they’re combined on Line 2 with no separate overtime entry. That’s the standard, fully compliant approach.
How Does Homebase Help with Overtime Tracking and Payroll?
Homebase makes overtime compliance easier by automatically applying federal and state rules to the hours your team works. With accurate time tracking from our time clock and streamlined digital timesheets, you get precise, regular, and overtime totals before any tax calculations happen — eliminating the errors that confuse you about why overtime “looks taxed differently.”
Once hours are correct, Homebase turns them into payroll with consistent FICA and withholding calculations, just like the IRS requires. Real-time alerts help you prevent unexpected overtime, and integrated payroll filing reduces the risk of costly tax mistakes that often stem from incorrect overtime records.
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Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced IRS Publication 15 and Publication 15-T for 2025 withholding rules, FLSA overtime guidance from the U.S. Department of Labor, and federal tax deposit requirements from the IRS. We also reviewed state payroll rules commonly affecting restaurant and retail businesses to confirm how overtime, tip reporting, and wage calculations interact under current regulations.