Overtime is not taxed more - it is taxed at your marginal rate, which is not your average rate
Published 2026-11-09 · updated 2026-11-09 · figures for tax year 2026
Every overtime season the same claim comes back: the extra hours were "taxed away". The claim is wrong, and it is wrong in a way that can be shown with arithmetic rather than reassurance. Overtime is taxed at the same rates as every other dollar of ordinary income. What changes is that it arrives at the top of your income instead of the bottom, so it attracts your marginal rate — and the marginal rate looks alarming precisely because it describes the next dollar, not the average of all of them.
Marginal and average describe different things
At $60,000 in California, the average total rate is 19.9% — that is every dollar of tax divided by every dollar of pay. The marginal rate is 25.7%: federal 12.0%, California 6.0%, Social Security 6.2%, Medicare 1.5%. The two numbers are not in conflict; they are answers to two different questions. Nobody pays 25.7% on their whole salary, and nobody pays 19.9% on the next hour either.
What the next $10,000 is actually worth
Take the claim seriously and measure it. Moving from $60,000 to $70,000 - which is roughly 480 extra hours at a $21 base rate - the take-home difference is:
| Annual gross | Take-home, California | Take-home, Texas | Net kept on each extra $1 |
|---|---|---|---|
| $60,000 | $48,037 | $50,390 | — |
| $70,000 | $54,900 | $58,075 | CA +$6,863 ($0.69/$1) · TX +$7,685 ($0.77/$1) |
| $80,000 | $61,005 | $65,110 | CA +$6,105 ($0.61/$1) · TX +$7,035 ($0.70/$1) |
Read the last column as the honest answer to "what did I keep": $0.69 of every extra dollar in California between 60,000 and 70,000, and $0.77 in Texas, where there is no state income tax. The next step, 70,000 to 80,000, keeps $0.61 — lower, because more of it now sits above the 22% federal band. Every one of those figures is positive. There is no salary at which earning another dollar leaves you with less.
Why the kept amount beats the marginal rate
The marginal rate of 25.7% would suggest keeping 74.4%. The measured figure is 68.6% in California and 76.8% in Texas. The gap has two causes, and both are ordinary:
The standard deduction does not shrink. The first $16,100 of income is untaxed federally no matter how much arrives after it, so the effective rate on a $10,000 increment is computed above that floor, not from zero.
The increment straddles bands. $10,000 does not all land in the 22% band. The first part of it fills the remainder of the 12% band, and only the last part pays 22%. The marginal rate applies to the very last dollar; an increment pays an average of the bands it crosses. That is why a raise always nets more than the withholding on the first paycheck suggests, and then reconciles by December.
The full worked example: 30 an hour plus overtime
$62,400 is 40 hours a week at $30 an hour for 52 weeks. Add 10 hours of overtime a week at the 1.5 rate of $45 and the year becomes $85,800: $23,400 of it overtime. In California that produces take-home of $64,485 against $49,790 without the overtime — $14,695 more in the year, or 62.8% of the overtime money kept.
| Line | 40 hours | 40 + 10 overtime | Change |
|---|---|---|---|
| Gross | $62,400 | $85,800 | +$23,400 |
| Federal tax | $5,308 | $10,046 | +$4,738 |
| California tax | $1,717 | $3,590 | +$1,873 |
| Social Security + Medicare | $4,774 | $6,564 | +$1,790 |
| Take-home | $49,790 | $64,485 | +$14,695 |
Where the story comes from
Two things keep the myth alive, and neither is a tax rule.
Withholding on the overtime check looks disproportionate. If the extra money lands in one period, payroll annualises that period, decides you are a higher earner than you are, and withholds at a rate above your real average. The excess comes back in the refund. On the check itself, it looks like the overtime was taxed at 40% — because in that one period, provisional withholding was.
People compare the overtime check to a normal check instead of to the year. A bigger check that is only slightly bigger than usual reads as "the tax ate it", even when the arithmetic says a third of the extra hours were enough to make the month worth the disruption.
What this model does not cover
The arithmetic above stops at income tax and payroll tax. It does not model means-tested benefits, where an extra hour can genuinely reduce a credit by more than it pays — the benefit-cliff problem is real and is outside a paycheck calculator. It also does not model the additional Medicare tax above $200,000 of wages, which does raise the marginal rate at that point without ever creating a case where extra pay reduces net pay. Both of those are worth checking separately if your income sits near a threshold.
Put a number on it
The same mechanisms on an actual salary. Every figure here is computed by the engine that serves the calculators, so it matches the page it opens — nothing is copied.