How to Calculate the Taxes on Overtime
When your employees earn overtime pay, you compensate them at a higher rate than you use for regular payroll hours. A paycheck for an employee earning overtime will include both regular pay at the regular pay rate and overtime pay at the higher pay rate. The employee will owe state and federal taxes on the whole amount for the pay period, but a paycheck calculator won't distinguish between the earnings on the first 40 hours for each week and the higher earnings on the hours worked once the employee has crossed this threshold.
The overtime tax rate for 2018 is the same as the regular tax rate for 2018 at every wage level and for every type of reporting status. Payroll taxes are based on gross pay amounts. An employee earning $600 during a pay period by working 40 hours at $15 per hour will owe the same amount of tax as a worker who earns $600 for the same period working 40 hours at $12 per hour and 6.67 hours at the overtime rate of $18 per hour.
Read More: How to Calculate Average Overtime
To calculate federal income tax on a paycheck that includes overtime hours, use IRS Circular E, the Employer's Tax Guide. This guide includes instructions for calculating taxes using either a percentage method or by use of tables made up of columns corresponding to the withholding allowances claimed on that employee's W-4 withholding form, as well as the employee's individual filing status, such as married or single. Find the line on the appropriate page and column and locate the line for that employee's gross wages, or the combined total of regular and overtime pay.
To calculate Social Security withholding on a paycheck that includes overtime hours, multiply .062 by the combined total of regular and overtime wages. To calculate Medicare withholding on a paycheck that includes overtime pay, multiply .0145 by the gross pay, or the combined regular and overtime wage amounts.
The amounts you withhold for income tax are unlikely to precisely add up to the amounts your employee will actually owe at the end of the year. Federal tax tables are estimates based on the assumption that your employee earns the same amount every week. Taxes are withheld based on projected annual pay from the current week's earnings. Paycheck withholdings for periods that include overtime hours will be higher than for periods with no overtime. Added overtime pay can even bump an employee to a pay level with a higher income tax rate because the employee would in fact owe more in taxes if every paycheck throughout the year included overtime hours. Federal tax returns due April 15 of each year provide an opportunity to reconcile the taxes withheld throughout the year with the amounts your employee actually owes, and overpayments are returned as tax refunds.
To determine payroll tax on overtime pay, add the regular wages for the payroll period to the overtime wages for that period. Use this sum as the gross pay basis for calculating payroll tax liability.