How are overtime taxes calculated?

Employers generally pay overtime on the employee’s next regular paycheck. State law may allow employers to use a different pay system, for example applicable payroll for the next regular pay period in which overtime was earned. Overtime is normally paid from the employees’ regular wages and is subject to the same taxes as them. As an employer, you can calculate the taxes applicable to overtime as you do with regular wages.


Under federal law, overtime is hours of work that are worked after 40 hours per week, state law may treat overtime as hours of work that exceed a certain daily amount. Overtime pay is made at the rate of 1.5 times the regular pay of an employee and is added to the normal salary of the employees. The payment of overtime that is made on the same paycheck as the employee’s regular salary, increases his gross salary and consequently his tax withholding.

Federal income tax

An employee’s federal tax withholding depends on the information on his W-4 form and the IRS (Internal Revenue Service) withholding tables. Obtain the employee’s marital status (line 3) and the applicable subsidies (line 5), from their W-4 form. It then uses the IRS Circular E withholding tax table for the appropriate year that matches the employee’s marital status, allowances, taxable wages, and pay period to calculate federal tax withholding. If the employee has a deduction that qualifies as non-taxable (such as Section 125 of the medical plan), subtract the benefit from his gross wages to get his taxable wages.

FICA taxes

FICA taxes include Social Security and Medicare taxes, which the Federal Insurance Contribution Act authorizes the IRS to collect. In 2011, you must calculate Social Security tax at 4.2 percent of the worker’s taxable salary and up to $ 106,800 for this year, and Medicare at 1.45 percent of their total taxable income.

State and local taxes

All states except Nevada, Florida, Alaska, South Dakota, New Hampshire, Texas, Washington, Tennessee, and Wyoming require employers to withhold state taxes from their employees’ wages, including overtime earnings. Use the withholding procedures of your state revenue agency to calculate the applicable income tax. Many states use a withholding system comparable to federal income tax, but require you to use the employee’s state withholding exemption certificate and state tax withholding tables. Some states require the withholding of a fixed percentage of the worker’s taxable wages, while some local governments require local income tax withholding for a particular city or school district. Apply the recommendations of your local tax advisor to withhold local income tax.


In general, the more an employee earns, the higher the taxes they must pay. If the amount of overtime for employees is considerable and must be paid at the same time as their regular wages, then you can pay the overtime separately to reduce withholding tax.

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