Quick Answer: Overtime is taxed at the exact same rate as regular wages — there’s no special “overtime tax.” Overtime checks only look more taxed because payroll systems temporarily assume the higher earnings will continue all year, which increases withholding for that one paycheck.
Once your team understands how withholding works, it becomes easier to clear up misconceptions that affect your staffing, scheduling, and shift coverage.
What Are the Basics of Overtime Pay and Taxes?
Understanding how overtime pay and taxes work starts with knowing how federal rules treat overtime compared to regular wages.
Under the Fair Labor Standards Act (FLSA), non-exempt hourly teams must receive time-and-a-half pay for all hours worked over 40 in a workweek. This overtime pay counts as ordinary income and faces the same federal, state, local, Social Security, and Medicare taxes as regular wages.
So why the confusion?
The IRS taxes all income the same way. If someone earns $15/hour normally and $22.50/hour in overtime, both rates follow the same tax rules.
Payroll systems must briefly treat a higher paycheck as if it will repeat all year, which increases withholding temporarily. This isn’t a higher tax rate — it’s just how withholding formulas work.
Both regular and overtime wages face identical tax requirements:
- Federal income tax.
- State income tax (if applicable).
- Social Security tax: 6.2% on wages up to $176,100 (2025).
- Medicare tax: 1.45% on all wages.
- Additional Medicare tax: 0.9% above IRS thresholds.
- Local taxes (where applicable).
What matters: Your total annual income, not whether individual dollars came from regular or overtime hours.
Why Do Overtime Checks Look Smaller?
Many employees feel confused or frustrated when their overtime checks seem smaller than expected, but the math behind it is simpler than it looks.
Here's the real story: If an employee typically earns $800/week but makes $1,100 during an overtime week, the system temporarily calculates as if they’ll earn $57,200/year instead of $41,600. That projected increase bumps part of the paycheck into higher withholding brackets.
The reality: Even if overtime pushes someone into a higher tax bracket, only the extra dollars above that line get taxed at the higher rate. Your team always takes home more by working overtime. And if too much was withheld during those higher-earning weeks, they’ll usually get that money back at tax time.
Once your team understands why their overtime checks look smaller, it’s easier to clear up the misconceptions that affect your staffing decisions.
What Do Small Business Owners Need to Know?
For business owners, these misunderstandings can create scheduling challenges and compliance risks if not addressed proactively.
Talk about it upfront: explain that withholding looks higher only because payroll assumes that bigger paycheck will repeat all year. Their actual tax rate doesn’t change, and any extra withheld usually comes back at tax time.
Focus on compliance and accuracy: Beyond team education, you face serious financial exposure from overtime calculation errors. Restaurants and service businesses consistently receive heightened scrutiny and enforcement attention from the Department of Labor. DOL enforcement cases show small businesses paying $24,000 to over $158,000 in back wages, liquidated damages, and penalties for overtime violations.
Common restaurant overtime errors include: Failing to track pre-shift prep and post-shift closing duties; calculating overtime by pay period instead of weekly; misclassifying supervisors as exempt when they don't meet all three parts of the federal exemption test (salary basis, salary level of at least $684 per week, and duties requirements); excluding non-discretionary bonuses from overtime rate calculations.
These violations trigger DOL audits and result in substantial penalties that dwarf the cost of proper overtime tracking.
How Does Homebase Help Automate Calculations?
Stop losing critical shifts because your hourly teams fear overtime taxes. Homebase automates overtime calculations, tracks all work hours including pre and post-shift duties, and integrates seamlessly with Homebase Payroll. We help you fill shifts when you need coverage most while eliminating the manual math that leads to costly violations.
When your Employee Scheduling, Time Clock, and Homebase Payroll work together, you conquer your biggest scheduling obstacles. Your hourly teams get accurate, transparent pay statements that clarify the difference between tax withholding and actual tax rates, building trust while you maintain compliance and fill every shift.
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Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article reflects accurate guidance for small business owners. We start with primary information from official government agencies, verify details using current tax and payroll regulations, and use reputable industry insights only to supplement—not replace—official rules.
For this piece, we referenced guidance from the U.S. Department of Labor, IRS publications and tax brackets, the American Payroll Association, HR Morning case studies, and Homebase’s own payroll and time-tracking resources.