Is overtime taxed at a different rate then regular time?

[Specop 007]

Lets say you work 60 hours in a week. Will the 20 hours of overtime be taxed at a different rate then what the standard 40 hours are taxed at? I've heard some people say its not worth it to work overtime cause it all goes to the tax man. Is there any truth to that?

 

[MiniDoom]

The man just borrows it, and will probably give it back at the end of year.

 

[DaveSimmons]

It will be witheld at a higher rate during the year, but when you file your return it is taxed exactly the same. Income tax is based on your total for the year not on weekly peaks and valleys.

 

[torpid]

I wonder the same thing. I think it's just the perception of diminishing returns. If I work an extra 8 hours it feels like a lot more work than 8 hours and when the paycheck only shows my hourly rate x 8, it seems barely worth it.

 

[Specop 007]

Originally posted by: DaveSimmons
It will be witheld at a higher rate during the year, but when you file your return it is taxed exactly the same. Income tax is based on your total for the year not on weekly peaks and valleys.

That makes sense. Is it withheld at a higher rate then regular time, and do you know by how much?

Thanks

 

[torpid]

I don't get it. Why would it be withheld at a higher rate?

 

[spidey07]

Originally posted by: torpid
I don't get it. Why would it be withheld at a higher rate?

Because it is witheld at the rate assuming you make that much every week for the entire year.

It's straight highway robbery in my book. Burns me up to see 40.5% just lopped off.

 

[DaveSimmons]

Originally posted by: Specop 007
That makes sense. Is it withheld at a higher rate then regular time, and do you know by how much?

It depends: the higher rate is based on what your taxes would be if you made that much every week. So if you made an extra $500 in overtime one week, it's taxed as if you were going to make $26,000 more for the year.

You also pay all the other taxes/contributions too (state, social security) so it could be 40-50%. You do get some of it back at the end of the year though.

 

[torpid]

Originally posted by: spidey07
<div class="FTQUOTE"><begin quote>Originally posted by: torpid
I don't get it. Why would it be withheld at a higher rate?</end quote></div>

Because it is witheld at the rate assuming you make that much every week for the entire year.

It's straight highway robbery in my book. Burns me up to see 40.5% just lopped off.

Oh right... you mean if you normally are under $75k but your overtime makes it look like you would make over $75k, suddenly you are withheld at a higher tax bracket? If it's not a different tax bracket then I don't get it. If I'm in the same tax bracket then it should be the same % as long as I don't go over the bracket.

 

[JulesMaximus]

Originally posted by: DaveSimmons
<div class="FTQUOTE"><begin quote>Originally posted by: Specop 007
That makes sense. Is it withheld at a higher rate then regular time, and do you know by how much?</end quote></div>
It depends: the higher rate is based on what your taxes would be if you made that much every week. So if you made an extra $500 in overtime one week, it's taxed as if you were going to make $26,000 more for the year.

You also pay all the other taxes/contributions too (state, social security) so it could be 40-50%. You do get some of it back at the end of the year though.

:thumbsup: The higher your total wages for the pay period, the more tax you'll have withheld. The overtime itself is not taxed at a different rate. Your gross taxable income is the basis for calculating the tax withheld.

 

[EagleKeeper]

Originally posted by: torpid

Originally posted by: spidey07

Originally posted by: torpid

I don't get it. Why would it be withheld at a higher rate?

Because it is withheld at the rate assuming you make that much every week for the entire year.

It's straight highway robbery in my book. Burns me up to see 40.5% just lopped off.

Oh right... you mean if you normally are under $75k but your overtime makes it look like you would make over $75k, suddenly you are withheld at a higher tax bracket? If it's not a different tax bracket then I don't get it. If I'm in the same tax bracket then it should be the same % as long as I don't go over the bracket.

It is not the tax bracket - it is the amount being taxed extrapolated as for the complete year.

If your normal income is $52K - assuming $25/hr
If you get time and half for 10 extra hours that is an extra $375.
$375 added to $1K is 1375.

Your tax rate for that paycheck is now based on 1375 * 52 (71.5K - expecting that you could be getting the 10/hr OT every week for the full year).

This new rate applies to your Federal and State. It does not affect the SS.

At the end of the tax year, if you did not average the 10 hrs/wk OT, then you will have had more tax than needed withheld and you may be due a refund on the excess.

 

[spidey07]

Tax rates, you can see how you could move into a different bracket.

$0-$7,825 10% of the amount over $0

$7,825-$31,850 $782.50 plus 15% of the amount over 7,825
$31,850-$77,100 $4,386.25 plus 25% of the amount over 31,850
$77,100-$160,850 $15,698.75 plus 28% of the amount over 77,100
$160,850-$349,700 $39,148.75 plus 33% of the amount over 160,850
$349,700-no limit $101,469.25 plus 35% of the amount over 349,700

 

[crownjules]

^^^^^^ Tax brackets vary based on status: single, married, dependents, etc. Those look very high for anything but a 'family'. Someone filing single caps out somewhere around $90K I believe.

<div class="FTQUOTE"><begin quote>Originally posted by: torpid
I don't get it. Why would it be withheld at a higher rate?</end quote></div>

If you normally get paid $25/hr and work 40h/wk then you're making $1000/wk, or $52K in a year. That places a single person squarely in the ~30% tax bracket.

If you work an additional 20 hours one week, and you get time and a half, that's an additional $750, bringing your weekly total to $1750. If you extrapolate that over the course of a year, you're yearly take would be $91K and as a single person you would then find yourself in the highest tax bracket (~35%).

That's why. The weekly government 'take' is based on the projection of your yearly income based on that one paycheck. At least that's the best way I can think of why it varies.

 

[Specop 007]

Originally posted by: EagleKeeper
<div class="FTQUOTE"><begin quote>Originally posted by: torpid

<div class="FTQUOTE"><begin quote>Originally posted by: spidey07

<div class="FTQUOTE"><begin quote>Originally posted by: torpid

I don't get it. Why would it be withheld at a higher rate?</end quote></div>

Because it is withheld at the rate assuming you make that much every week for the entire year.

It's straight highway robbery in my book. Burns me up to see 40.5% just lopped off.</end quote></div>

Oh right... you mean if you normally are under $75k but your overtime makes it look like you would make over $75k, suddenly you are withheld at a higher tax bracket? If it's not a different tax bracket then I don't get it. If I'm in the same tax bracket then it should be the same % as long as I don't go over the bracket.</end quote></div>

It is not the tax bracket - it is the amount being taxed extrapolated as for the complete year.

If your normal income is $52K - assuming $25/hr
If you get time and half for 10 extra hours that is an extra $375.
$375 added to $1K is 1375.

Your tax rate for that paycheck is now based on 1375 * 52 (71.5K - expecting that you could be getting the 10/hr OT every week for the full year).

This new rate applies to your Federal and State. It does not affect the SS.

At the end of the tax year, if you did not average the 10 hrs/wk OT, then you will have had more tax than needed withheld and you may be due a refund on the excess.

So actually the higher withholding amount is calculated on all hours for the pay period equally, not just for the hours that are overtime.

 

[torpid]

I did the calculations above where $52k and $71k are in the same bracket... indeed the rate is 2% higher since there is the 25% over $30,000 part. But if you break into a new bracket, it's a much higher difference.

 

[DaveSimmons]

Originally posted by: torpid
Oh right... you mean if you normally are under $75k but your overtime makes it look like you would make over $75k, suddenly you are withheld at a higher tax bracket? If it's not a different tax bracket then I don't get it. If I'm in the same tax bracket then it should be the same % as long as I don't go over the bracket.

Remember that only amounts in a higher bracket are taxed at a higher rate.

If you made $50K taxed at X% and your salary/wages increase to $75K, the first $50K is still taxed exactly the same. Only the extra $25K is taxed at a higher % rate.

When people say something like "I know a guy whose salary went up but it put him into a higher bracket so he made less" they are wrong, and just spreading an urban legend.

Only really low income people can be (sort of) affected this way, by now making too much to qualify for some welfare they were getting.

Edit: rock salt

 

[HeroOfPellinor]

It is taxed the same.

What happens in any payroll system is that your paycheck is annualized based on your pay frequency. So the more you make in a given cycle, the higher bracket you are in and the more taxes will be taken out. If it's really a lot of OT or you are receiving a bonus, you can request or the payroll administrators may automatically change your pay frequency for that check to put you in a lower bracket.

 

[Andrew Christianson]

It will be witheld at a higher rate during the year, but when you file your return it is taxed exactly the same. Income tax is based on your total for the year not on weekly peaks and valleys.

That does make sense, but I don't like the fact of having to wait till tax season to get my extra earnings. I was shorted $110 what I expected and if I calculate no time and a half I only made an extra $60 net off the 24 extra hours I worked. Government definitely doesn't want people to get ahead.

 

[Drako]

Nice necro.

That does make sense, but I don't like the fact of having to wait till tax season to get my extra earnings. I was shorted $110 what I expected and if I calculate no time and a half I only made an extra $60 net off the 24 extra hours I worked. Government definitely doesn't want people to get ahead.

FYI, you can adjust your withholding using a W-4.

 

[Mike64]

Nice necro.
FYI, you can adjust your withholding using a W-4.

Sort of. You "can", but you're "not supposed to", for whatever that's worth...

I have no idea what the (probably mostly theoretical) penalty is, but assuming what you mean is changing your number of exemptions/dependents, that would be filling a "false" form unless the number has actually changed. If you do it rarely, it's unlikely to be problematic in any sense, but if you try to get cute and change it multiple times in a year, someone might start asking how exactly that number keeps changing with such frequency...

 

[Red Squirrel]

Once you make more than a certain amount, for a given pay cheque, then you will get taxed more, but from what I understand you only get taxed more for THAT amount. Then at tax time I think the same concept is applied again but for your YTD pay cheque to determine if you need to pay more. Though a bunch of other stuff is then factored in like charity donations, RRSPs etc so it's more complicated. That's why I let a pro handle it.

One time I thought I got screwed because I hit a higher bracket within like $50 so figured I'd get taxed at that rate for the whole year and end up owing a crazy amount, but my tax person said you only get taxed for the amount that is over the bracket. So in my case it was only a few hundred.

So at least I assume it works the same way on a per cheque basis. Taxes can be pretty complicated though, so who knows. I just know that when I work tons of OT, I don't see as much of a bump in pay as if those were regular hours spread out more, but still end up making more in the grand scheme of things.