Overtime tax: How to calculate withholdings and track hours

Editorial Team

5 min read
Men moving a pallet of boxes in a warehouse

Tracking overtime can be a huge headache for small business owners. But it’s also super important that you stay on top of it. Your employees’ overtime work doesn’t just affect their pay, it can also impact your payroll taxes, which need to comply with federal, state, and city labor laws.

While it’s easy to assume that overtime is taxed more, the truth is it’s not–the overtime tax rate is exactly the same as it is for an employee’s regular wages. However, overtime earnings can push workers into a new tax bracket. And when that happens, you’ll need to adjust how much to withhold in their payroll. 

Read on to learn how overtime pay can impact the tax brackets your employees are in, how to calculate taxes with overtime, and how apps like Time Clock by Homebase can simplify the process.

How is overtime taxed? 

The Department of Labor defines overtime as any hours worked outside of a full-time 40-hour workweek. And the legal overtime pay rate is 1.5 times an employee’s regular hourly rate. 

Gross income consists of an employee’s combined regular and overtime income. But while regular income is a fairly stable amount, overtime income is an unstable variable that changes your employees’ gross income. And when an employee’s overtime earnings push their gross income into the next tax bracket, the IRS and state then require that a greater percentage of their income is withheld. 

So overtime work can mean that you need to withhold more taxes from an employee’s pay because it might push an employee into a higher tax bracket. What this means for you is that you’ll need to understand how your employees’ overtime hours are affecting their tax bracket, so you can withhold the correct amount from their paychecks.

Overtime and tax brackets

Let’s consider an example. Here’s a look at a few 2022 annual income tax brackets for single filers. Notice the difference in tax rate between the income bracket of $10,275 to $41,775 and the next one up. This means that for someone making $42,000 the tax rate is nearly double what it would be for someone making $41,000. 

Taxable income (for the year)Tax due (for the year)
1Up to but over $10,27510% of the taxable income
2Over $10,275 but not over $41,775$1,027.50 + 12% of the excess over $10,275
3Over $41,775 but not over $89,074$4,807.50 + 22% of the excess over $41,775

Now imagine that you’re running payroll for an employee who normally makes $800 per week in regular earnings. You deduct the standard amounts, as usual, which include federal income taxes (based on employee earnings and W-4 withholding allowances) and FICA taxes (which include 6.2% for Social Security and 1.45% for Medicare). 

Normally, this employee is in the second tax bracket. Now imagine that this same employee worked overtime during one week and made over $1,000 that week. Those additional hours may have just pushed them into the third bracket. That means, you’ll need to withhold more federal income taxes from their paycheck that week than you normally would. 

How to calculate federal income tax withholdings

You can manually calculate your employee’s federal income tax withholdings (FITW) by taking the following steps:

  1. Figure out your employee’s total taxable income
  2. Determine your employee’s filing status
  3. Use the Wage Bracket Method Tables in the IRS Publication 15-T to calculate your employee’s income tax withholdings

Of course, this is also in addition to the employer-paid taxes you calculate and provide for each employee, including Federal Unemployment Tax Act (FUTA), which is a 6% tax on the first $7,000 of each employee’s earnings, and state unemployment insurance (SUI), which is based on a state-provided rate.

How Homebase can help with overtime and payroll taxes

While it’s certainly possible to do payroll taxes manually, it can be a time consuming and complicated process. And it’s super easy to make mistakes. With apps like Homebase, though, you can automate the process, saving you time and letting you rest easy knowing that you’re complying with federal, state, and city labor laws.

With Homebase, you get a free time clock that easily integrates with your Clover POS system. Time Clock by Homebase tracks your employees’ hours and notifies you when they get close to overtime. It’s also customizable, so you can set break and overtime rules that align with your state and local labor laws. In addition, Homebase allows you to manage your employees’ documents, formalize requests for time off, review performance, and more.

Watch this video about tracking overtime taxes and everything you need to know–and read about why Clover merchants use and love Homebase

Sign up for Homebase today to help simplify your scheduling, payroll, and tax deductions.


Important Disclaimer: Homebase is the sole and exclusive provider of services described in this article. Clover does not make any representations or guarantees as to these products / services.  Please see Homebase Terms & Conditions for more information.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

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