How to Figure Paycheck Taxes for Overtime
The overtime tax rate is based on the same rules as the tax rate on regular pay. If your employees earn time-and-a-half for overtime work, you add this to their regular pay and calculate payroll taxes on the total amount. You can find an overtime tax calculator online, but it's not hard to calculate the taxes yourself.
To set the overtime tax rate, calculate the time-and-a-half pay for the overtime hours. Add that amount to the base pay. Subtract pretax deductions and then calculate the various tax payments on what remains. Unless the employee changed tax brackets, the income tax rate is the same as usual.
Who Gets Overtime?
Employees typically earn time-and-a-half for every hour they work over 40 in a week. Suppose your IT person earns $24 an hour but puts in 45 hours this week, making urgent repairs. For the extra five hours, the employee earns $36 per hour, 1.5 times the regular rate.
Some employees who meet certain conditions are exempt from overtime. For example, perhaps they work on a salary basis rather than per hour, and their salary is at least $684 per week (as of late 2019).
Salaried employees can still earn overtime unless they meet other conditions. Some examples:
- Exempt managers run the business or a recognized department and direct the work of at least two other full-time employees. They either have the power to hire and fire, or their recommendations have a significant influence on such decisions;
- An exempt administrator does non-manual office work related to running the business. The work requires professional judgment and discretion; and
- An exempt professional works in a scientific or creative field that requires either advanced technical or scientific knowledge or creative, original thinking and ideas.
Classifying employees as exempt when they're not can lead to complaints and government penalties.
The Overtime Tax Rate
Calculating overtime for nonexempt employees takes a little work, particularly if they have a wage like $17.31 per hour, where time-and-half isn't easy to multiply in your head. However, the overtime tax rate works on the same principle as calculating regular pay, just with more money.
For example, if your sales clerks earn $15 an hour, a 40-hour week earns them $600 pretax pay. If one of them puts in 10 hours of overtime, that's $22.50 an hour or $225 after 10 hours. That worker's total pay for the week is $825.
Once you have the total, you calculate tax on the total. The tax rate doesn't change just because some of the hours are labeled overtime.
Calculating Overtime Paychecks
The first step in calculating tax is to remove any pretax deductions from the pay. If the employee who earned $825 this week pays $16.50 pretax per weekly pay period, you subtract that before calculating tax. $825 less $16.50 leaves $808.50 as the taxable pay.
Using an overtime tax calculator, a spreadsheet or accounting software, you then calculate the various taxes to deduct, including income tax withholding, unemployment tax and Social Security. You are guided partly by the employee's W4 form, which lists dependents and indicates whether they want extra withholding to cover the tax on other income.
Overtime Tax Brackets
One thing that can complicate the overtime tax rate is if overtime pushes your employee into a higher tax bracket. For example, suppose an employee's weekly pay for the year puts them at the top of the 12% tax bracket. They put in 15 hours of overtime, all of which fall into the next tax bracket, 22%.
There's a widespread myth that if someone jumps into another tax bracket, that rate applies to their entire pay, but that's not true. In this example, the overtime tax rate is 22%, but only for the money earned for those 15 hours. Everything else stays at 12%.
If the employee goes on to earn more overtime, that amount is taxed at 22%, too. Even though the government takes a larger bite out of overtime, the remaining take-home pay is still more than the regular hourly salary.
- If you calculate that your earnings are approaching the next tax bracket close to the end of the tax year, think carefully about accepting more overtime. You could see up to a 10 percent increase in the amount of tax you're liable to pay.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs.