Monitoring extra time for hourly employees will be one of many largest complications for small enterprise house owners managing payroll on their very own. If you happen to’re a type of enterprise house owners, you is likely to be questioning: Is extra time taxed extra?

It’s straightforward for the extra time hour depend to get out of hand as you handle a busy crew, particularly with out time monitoring instruments with extra time alerts to warn you earlier than it’s time to do payroll.

So, how will these extra time hours have an effect on your payroll taxes?

Right here’s the brief reply: Additional time itself isn’t taxed extra. However extra time earnings can push extra time employees into a brand new tax bracket. 

Don’t fear — we’re going to reply your questions on extra time taxes and exemptions, so you are feeling empowered sufficient to run your personal payroll with out having to show to knowledgeable. Let’s dive in to be taught extra about extra time pay, the best way to calculate taxes with extra time, and extra time tax exemptions.

Is extra time taxed extra?

Additional time hours — which the Department of Labor considers any hours labored exterior a full-time, 40-hour week — aren’t taxed extra. When operating hourly payroll, you’ll withhold the identical taxes from an worker’s extra time wages that you’d from their common wages. 

You don’t should make two separate calculations when withholding federal, state, and FICA (Federal Insurance coverage Contributions Act, i.e. Social Safety and Medicare) taxes out of your worker’s earnings. 

An worker’s extra time earnings can push them into the following tax bracket, nevertheless, by which case the IRS and state tax a higher proportion of their gross revenue, which includes their mixed common and extra time revenue.

How is extra time taxed?

If you happen to’re running your first payroll for an worker who labored extra time, deduct taxes from the sum of their extra time and common earnings. So, in the event that they made $1,000 in common earnings and $300 in extra time earnings, you’ll add these quantities collectively and provide you with a sum of $1,300. 

On payday, right here’s what you’ll withhold from that $1,300:

Worker-paid taxes

  • Federal revenue taxes, that are based mostly on worker earnings and W-4 withholding allowances
  • FICA taxes: 6.2% for Social Safety and 1.45% for Medicare

Employer-paid taxes

  • FUTA (Federal Unemployment Tax Act) taxes: An employer pays a 6.0% tax on the primary $7,000 of worker earnings
  • SUI (State Unemployment Insurance coverage): An employer pays a tax based mostly on a state-provided fee

You’ll be able to relaxation straightforward understanding there’s no particular extra time tax. You’ll simply withhold the required taxes from an worker’s whole revenue for that pay interval, which is common plus extra time earnings.

Sure, extra extra time work can imply withholding extra taxes, however that’s as a result of workers simply get taxed at the next fee when their extra time earnings transfer them to the following tax bracket.

Additional time tax brackets

As a result of the authorized extra time fee of pay is 1.5 occasions an worker’s common hourly fee, staying on prime of your small enterprise labor costs means maintaining a tally of expensive extra time hours. It may possibly additionally complicate worker taxes if their extra time hours push them into the next tax bracket.

Let’s have a look at a number of 2022 annual revenue tax brackets for single filers to see why that issues:

Taxable revenue (for the yr) Tax due (for the yr)
As much as however not over $10,275 10% of the taxable revenue
Over $10,275 however not over $41,775 $1,027.50 + 12% of the surplus over $10,275
Over $41,774 however not over $89,074 $4,807.50 + 22% of the surplus over $41,775

Right here’s the place it will get tough: If an worker makes $800 per week in 2022, it’s important to withhold taxes based mostly on the second tax bracket on this chart. 

But when they work extra time hours throughout every week in July and make $1,000, that pushes them to the third bracket. Meaning you’ll should withhold extra federal revenue taxes from their paycheck that week than you usually would.

How is extra time tax calculated?

Whereas there’s no particular ‘extra time tax,’ you’ll must calculate taxes for extra time identical to you’d for normal taxes. 

Calculate your worker’s extra time tax

When running payroll, tax your worker’s extra time wages along with their common wages. Let’s check out the way you’d calculate the FITW (Federal Earnings Tax Withholdings) for an instance worker, Joaquin, who we’ll fake you pay weekly.

  1. Work out your worker’s whole taxable revenue. Joaquin makes $18 per hour and works 40 hours every week, so he made $720 in common wages.
    However Joaquin additionally labored 7 additional hours of extra time this week. So, based on the Honest Labor Requirements Act, it’s important to pay him time-and-a-half, or 1.5 occasions his hourly wage for every extra time hour. Joaquin’s extra time fee is $27 an hour, and he made ‌$189 in extra time wages. 
    Add the common pay and extra time pay collectively to determine what Joaquin’s taxable revenue is:
    $720 (common earnings) + $189 (extra time earnings) = $909 (whole taxable revenue)
  2. Decide your worker’s submitting standing. Use Joaquin’s Kind W-4 to find out whether or not he has any dependents. His submitting standing is marked as ‘single,’ and he hasn’t indicated every other withholdings. Meaning he’ll have the utmost FITW taken from his paycheck in comparison with different workers who file collectively and/or have dependents.
  3. Use the Wage Bracket Methodology tables within the IRS’s Publication 15-T to calculate your worker’s revenue tax withholdings. Go to web page 11 for the ‘Wage Bracket Methodology Tables for Guide Payroll Methods with Kinds W-4 from 2020 or Later.’ Use the worksheet, or just scroll all the way down to the Weekly Payroll Interval tables till you discover Joaquin’s wage bracket for that week. As a result of he made $909 that week, and since he has commonplace withholding standing as a single filer, you’ll withhold a regular deduction of $75 in revenue taxes for Joaquin.

It’s attainable to do payroll taxes manually, but it surely takes time to calculate revenue tax withholdings for each worker. That’s why we advocate utilizing an automatic payroll provider software program like Homebase to keep away from tax legal responsibility and make this course of quicker, simpler, and error-free.

Are there any exemptions to the extra time tax legal guidelines?

Understanding in case your workers are exempt from extra time tax legal guidelines means determining whether or not they’re exempt from extra time pay. In line with the FLSA (Honest Labor Requirements Act), workers are exempt from extra time pay in the event that they meet these necessities:

  • You pay them on a wage foundation: You pay an worker an annual wage fairly than an hourly fee.
  • You pay them the federal minimal weekly requirement. As of January 2020, workers aren’t entitled to extra time pay if their employer pays them a weekly minimal wage of $684 every week.  
  • Worker duties move the duties take a look at for exempt white-collar employees. Employers don’t should pay extra time if their workers’ job description passes the duties take a look at for govt, administrative, {and professional} workers. For instance, the FLSA outlines the primary duty of professional workers as one which entails “invention, creativeness, originality, or expertise in a acknowledged area of inventive or artistic endeavor.”

Go to Homebase’s state labor laws hub to be taught extra about your state’s necessities for workers who’re exempt and non-exempt from extra time pay.

How Homebase can automate your payroll taxes

As a small enterprise proprietor manually monitoring time and operating your personal payroll, it’s not simply taxes that fear you about extra time — it’s payroll compliance as properly. You need to be sure you’re doing every little thing you may to comply with your native labor tips for extra time.

Homebase’s free time clock device takes that off your plate with computerized clock-outs and alerts notifying you when workers are getting near extra time.

It’s also possible to use it to arrange break and extra time guidelines that may maintain you compliant with federal, state, and native labor legal guidelines, in addition to FLSA guidelines.

Final however not least, Homebase’s HR tools and payroll features embrace an intensive library of assets, guides, templates, and automations that will help you get began so that you just don’t should change into your personal HR professional when payday comes round.

Additional time tax FAQs

Why is extra time taxed?

Additional time is taxed as a result of the IRS nonetheless considers it a part of an worker’s revenue. Though no particular extra time tax exists, you continue to should withhold federal revenue and FICA taxes from an worker’s extra time wages.

Does extra time get taxed otherwise than common time?

Additional time doesn’t get taxed any otherwise than common wages. Additional time wages can, nevertheless, improve an worker’s gross pay sufficient that they’ll transfer into the next tax bracket. For instance, if an worker who often earns $800 per week works sufficient extra time to earn $1,000 in a single week, you’ll should withhold extra federal revenue taxes than you often do throughout that week.

What are the tax brackets for 2022?

Under are the annual federal revenue tax brackets for 2022 based on the IRS’s Publication 15 – T. Remember the fact that these tax brackets are for normal withholding and never for workers who’ve checked the field in Step 2 of Kind W – 4:

 

Married Submitting Collectively
At the very least— However lower than— The tentative quantity to withhold is— Plus this proportion— Of the quantity that the Adjusted Annual Wage or Cost exceeds—
$0  $13,000 $0.00  $0.00  0% $0
$13,000  $33,550  $0.00  10%  $13,000
$33,550  $96,550  $2,055.00  12%  $33,550
$96,550  $191,150  $9,615.00 22%  $96,550
$191,150  $$353,100  $30,427.00  24%  $191,150
$353,100  $444,900  $69,295.00  32%  $353,100
$444,900  $660,850  $98,671.00  35%  $444,900
$660,850  $174,253.50  37%  $660,850

 

Single or Married Submitting Individually
At the very least— However lower than— The tentative quantity to withhold is— Plus this proportion— Of the quantity that the Adjusted Annual Wage or Cost exceeds—
$0  $4,350  $0.00  0% $0
$4,350  $14,625  $0.00  10%  $4,350
$14,625  $46,125  $1,027.50  12%  $14,625 
$46,125  $93,425  $4,807.50  22%  $46,125
$93,425  $174,400  $15,213.50  24%  $93,425
$174,400  $220,300  $34,647.50  32%  $174,400
$220,300  $544,250  $49,335.50  35%  $220,300
$544,250  $162,718.00  37%  $544,250

 

Head of Family
At the very least— However lower than— The tentative quantity to withhold is— Plus this proportion— Of the quantity that the Adjusted Annual Wage or Cost exceeds—
$0  $10,800  $0.00  0%  $0
$10,800  $25,450  $0.00  10%  $10,800
$25,450 $66,700  $1,465.00  12%  $25,450
$66,700  $99,850  $6,415.00  22%  $66,700
$99,850  $180,850  $13,708.00  24%  $99,850
$180,850  $226,750  $33,148.00  32%  $180,850
$226,750  $550,700  $47,836.00  35%  $226,750
$550,700  $161,218.50  37%  $550,700

 

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