How Is Overtime Pay Taxed? (The Marginal Rate Myth, Again)

Q: What is the 2026 OBBBA overtime tax exclusion?

The One Big Beautiful Budget Act allows non-exempt workers to exclude up to $12,500/year in qualifying overtime pay from federal taxable income ($25,000 for married filing jointly), phasing out above $150,000 annual income for single filers. FICA still applies.

Q: Does overtime affect my tax bracket for all my income?

No. Even if overtime pushes you into a higher bracket, only the income above the bracket threshold is taxed at the higher rate. Your regular salary income is unaffected.

June 12, 2026·6 min read

Overtime pay is not taxed at a special higher rate. It's taxed at your marginal federal income tax rate— the same rate as the last dollar of your regular salary. The reason overtime looks more heavily taxed on your pay stub is withholding mechanics, not a different tax rate. And in 2026, there's a new overtime exclusion that changes the math for qualifying workers.

Why Overtime Looks Heavily Taxed (But Isn't)

When employers calculate paycheck withholding, they annualize your pay. An overtime paycheck that's $500 higher than normal is treated as if you'll earn that $500 extra every pay period all year — bumping the withholding to a higher bracket for that check. At tax time, your actual annual income is calculated, and if too much was withheld, you get a refund.

The withholding is temporary tax prepayment, not a permanent rate. Your final tax bill is the same regardless of whether the income came from regular hours or overtime.

2026 OBBBA Overtime Tax Exclusion (New)

Important 2026 Change

The One Big Beautiful Budget Act (OBBBA) includes a provision allowing qualifying workers to exclude up to $12,500 of overtime payfrom federal taxable income ($25,000 for married filing jointly). This exclusion applies to non-exempt employees paid at time-and-a-half under the FLSA. The exclusion phases out above $150,000 in annual income (single) / $300,000 (MFJ). Note: this provision's implementation timeline may vary — verify current IRS guidance before filing.

In practical terms: if you earn $60,000 base and $10,000 in qualifying overtime, you could exclude the full $10,000 from federal income tax — saving $1,200–$2,200 depending on your bracket. FICA (Social Security + Medicare) still applies to overtime pay.

Overtime Tax Math: Three Examples

Worker	Base Pay	OT Pay	Marginal Rate	Tax on OT	Net OT (no exclusion)	Net OT (with exclusion)
Warehouse worker	$35,000	$5,000	12%	$983	$4,017	$4,617 (+$600)
Nurse	$65,000	$10,000	22%	$2,183	$7,817	$9,017 (+$1,200)
Electrician	$80,000	$12,500	22%	$2,729	$9,771	$11,271 (+$1,500)

Tax on OT includes federal income tax (at marginal rate) + FICA (7.65%). State tax not included. OBBBA exclusion column assumes full exclusion applies to qualifying OT pay.

Who Qualifies for FLSA Overtime?

The Fair Labor Standards Act (FLSA) requires time-and-a-half pay for hours over 40/week for non-exempt employees. You are likely non-exempt (and entitled to OT) if:

You're paid hourly (almost all hourly workers are non-exempt)
You're paid salary but under the 2024 DOL threshold of $43,888/year ($844/week) — below this, you must receive OT regardless of job duties
You don't meet the executive, administrative, or professional exemption criteria

If you're classified as exempt (most salaried office workers above the threshold), overtime law doesn't apply — your employer can require extra hours without extra pay.

Is It Worth Working Overtime?

Yes, almost always. Even at the 22% federal marginal rate + 7.65% FICA, you keep roughly 70 cents of every overtime dollar (before state tax). The OBBBA exclusion (if it applies to you) pushes that to 85–90 cents on the dollar.

The only scenario where overtime might not be worth it: if the extra income reduces an income-sensitive benefit (Medicaid, ACA subsidies near the cliff, SNAP) by more than the take-home pay adds. For most workers, this doesn't apply.

Calculate your total take-home with overtime included:

Hourly Wage Calculator → Enter your hourly rate and hours worked to see total take-home pay· Also:Adjust W-4 withholding to account for regular overtime income →

Frequently Asked Questions

Is overtime taxed at a higher rate than regular pay?

No. Overtime pay is taxed at your marginal federal income tax rate — the same rate as the top slice of your regular income. Overtime withholding on your pay stub may appear higher because employers annualize the paycheck, but your final tax liability is identical regardless of whether income came from regular hours or overtime.

How much of my overtime pay do I actually keep?

In the 22% federal bracket, you keep roughly 70–72 cents of every overtime dollar before state tax (22% federal + 7.65% FICA = 29.65% gone). With the 2026 OBBBA overtime exclusion (up to $12,500), qualifying workers keep closer to 85–92 cents on the dollar on excluded overtime.

What is the 2026 OBBBA overtime tax exclusion?

The One Big Beautiful Budget Act includes a provision allowing non-exempt workers to exclude up to $12,500/year in qualifying overtime pay from federal taxable income ($25,000 for married filing jointly). The exclusion phases out above $150,000 annual income for single filers. FICA still applies. Verify current IRS implementation guidance — this is a new provision.

Does overtime affect my tax bracket for all my income?

No. Even if overtime pushes you into a higher tax bracket, only the income above the bracket threshold is taxed at the higher rate. Your regular salary income is unaffected — only the overtime dollars that cross the bracket boundary are taxed at the higher rate.