The Truth About Overtime Tax: Is Overtime Taxed More Than Regular?
Overtime is one of the most commonly misunderstood topics for business owners. Let's dive into the truth.
Table of Contents
What is Considered Working Overtime?
How Much Do You Calculate Pay for Overtime?
Is there an Overtime Tax?
How is Overtime Taxed?
What are the Exemptions to the Overtime Tax Laws?
How to Track Overtime Pay?
What is Considered Working Overtime?
According to federal labor law, overtime is generally defined as anytime worked over 40 hours a week. State (and city) laws may differ.
You should note that there is no day definition of overtime. In other words, working 12 hours in a day does not qualify as overtime. A schedule where someone works three twelve hour shifts in a week would not result in overtime.
How Much Do You Calculate Pay for Overtime?
Federal law requires any time worked over forty hours in a work week must be paid 1.5 the regular rate. So if any employee makes $20/hour, overtime hours must be paid at $30/hour.
A common misconception is that salaried employees don't receive overtime pay. This is incorrect. For salaried employees, you compute there hourly rate by dividing their annual salary by 2,080 hours.
Is there an Overtime Tax?
No. Overtime wages show up on the W-2 with regular pay in Box 1. Now, the overtime earnings may force the employee into a higher tax bracket, which would result in a higher tax rate for them.
There are no additional payroll taxes on overtime pay. You will have increased employer taxes because of the increased wage amount, however. State and local laws may vary, so please consult a qualified professional.
How is Overtime Taxed?
Employees should report all wages as ordinary income. However, employees who receive substantial overtime pay may want to consider adjusting their tax withholdings to avoid owing additional taxes. To do this, they can fill out a new W-4 form provided by their employer. This will help ensure that enough taxes are withheld from their paycheck to cover their tax liability.
What are the Exemptions to the Overtime Tax Laws?
Yes. Federal labor law defines three general exemption categories,
The broadest is an exemption for executive, administrative, professional, computer & outside sales employees Under the Fair Labor Standards Act. Determining whether an employee qualifies for this exemption can be complicated. You can read more from the Department of Labor here. You might need to consult an HR specialist or labor attorney.
There are additional exemptions for employees of seasonal amusement or recreational facilities as well as farmworkers.
How To Track Overtime Pay?
Although you can use any method to track overtime pay, including the old fashioned punch clock, there are many digital solutions available. One excellent one we recommend is Swipeclock. In any case, you simply need to have a method to track each additional hour, or fraction, above forty hours a week.
It is important to track employees time, even if they are not doing any overtime work. I've seen employers subject to labor audits that can't prove that an employee DIDN'T work overtime, resulting in large penalties.
Impact of Overtime on Your Business?
If you find yourself consistently having to pay overtime, you might consider adding additional employees. We recommend tracking your Direct Labor Efficiency (DLE), which is a great way to track the impact of labor on your business over time. You can read more about the DLE in this article.
Conclusion
So no, there is no "overtime tax", and overtime is taxed just like regular wages. It is important to track the time of all of your non-exempt employees.
