When it comes to deciding whether working overtime is worth the risk of taking on more taxes or not, you may be unsure how the math works.
One reason many people decide not to work overtime is that they believe most of their earned income ends up going to taxes.
That isn’t necessarily always the case.
Figuring out how much tax you owe on your overtime hours largely depends on your standard income and the number of overtime hours that you work.
Here’s what you need to know about overtime, taxes, and whether overtime has more taxes taken out of it or not.
Is Overtime Taxed More?
No, overtime is not taxed more.
A common misunderstanding of how taxes and overtime work is that the wages earned during overtime are taxed at a different rate.
This isn’t true.
Your tax rate remains the same whether you’re working standard hours or overtime hours.
The distinction is that working overtime might earn you enough income that it pushes you into a new tax bracket.
In this instance, it isn’t your overtime that’s taxed more, it’s your gross income as a whole.
Your gross income is the total amount of income you make before taxes and other deductions are subtracted from it.
The IRS uses your gross income to determine which tax bracket you fall into.
The higher you are on the bracket, the higher your income, and the more taxes you pay.
The rate increases as the income increases.
As an example, if you make $30,000 a year without overtime, then your tax bracket falls into the $9,951 to $40,545 category according to the 2021 tax season.
That means your tax rate is 12%.
In terms of how much tax you’ll owe, it’s $995 plus 12% of your income after $9,950.
If you were to work overtime, then you might end up with a gross income of $45,000.
This would push you into the next tax bracket of $40,526 to $86,375.
The tax rate of that bracket is 22%.
As a result, you’ll have more taxes taken out of your income because you’re in a higher tax bracket.
It is not because overtime receives its own increased tax rate.
What Is Overtime?
An important term to understand is what qualifies as overtime.
You may be working overtime already and not even be aware of it.
The US government defines overtime as working more than 40 hours in a workweek.
They define a workweek as a consecutive time of 168 hours.
For most people, that means Monday through Friday.
The shifts that occur during the day might be different.
However, the standard number of hours that you work per week is 40.
That usually equates to about eight hours a day.
If you work more than 40 hours in a single workweek, then you’re working overtime.
The US government has rules for that, too.
Unless the particular employee is exempt, any employee who works overtime receives their regular hourly rate plus 50% (often known as time and a half) during those extra hours.
That’s because you’re working more for the profit of the business at the cost of your own energy, health, time with family, etc.
The reward is that you earn a higher rate of pay.
A few companies also choose to pay twice your hourly rate (or double-time) if you work overtime.
Is Working Overtime Worth It?
Some people may struggle with the idea of working more hours even though they’re earning more money.
Others may not be sure if the extra time is worth the extra money.
Here are a few reasons working overtime might be worth it for your situation.
1. Pay Off Debt
One of the main reasons workers choose to work overtime is that it allows them to pay off debt.
The average American has $90,000 in debt.
With prices increasing and wages staying about the same, it doesn’t give Americans much room to pay off their debts.
To help relieve some of their debt, workers can choose to work a little overtime.
Not only will they earn a bit more money, but the amount of money per hour is also increased.
They’ll earn more in a single hour than they would during their normal working hours.
Even if an individual works two extra hours of overtime a week, that could add up to an amount that could help them slowly chip away at their debt.
Working overtime could certainly be worth it for those who are struggling to pay their debt dues.
If you’re someone who has an interest in investing but doesn’t like the idea of risking your standard income, then working overtime may also be worth it.
Depending on how much overtime you work, you could start to put together a nice investment.
When you have enough to pay for the share that you want to purchase, you can do so knowing that it didn’t come directly from your standard income.
This is a safe way to invest since your livelihood isn’t threatened.
You can still rely on your standard income to pay your bills, mortgage, debt, and other expenses.
You can also add up your overtime hours to determine how much money to want to risk in investment.
If you only want to stick your toes into the market, then you don’t need to work that much overtime.
This flexibility ensures you can either quickly or slowly work up to an investment fund that you feel ready to enter the market with.
Working overtime can be worth it if you don’t want to risk your regular income playing around with stocks.
3. Funding A Personal Project
Working overtime is also worth it if you’re trying to fund a personal project.
This might be a business venture that you’re exploring, a new hobby, or even a vacation.
In terms of a new business venture, you may not want to use the money you earn for your household on your project.
If you’re a budget-conscious family, then you likely know that any extra money you have is going towards one thing or another.
That doesn’t mean you have to give up on your own personal projects, though.
Working an hour or two of overtime every week can potentially help you start a project fund.
All the money that you earn from working overtime can go towards funding the project.
In time, you’ll have enough that you can start to make decisions and purchases.
While the process is slower than pouring all your financial resources into it, the process is also safer.
It allows you to start your own business while not having to worry about feeding your family, paying your rent, or paying your mortgage.
Overtime is worth it if you have a personal project like a business venture that needs extra funds.
4. You Have Balance
One of the most important factors to determine whether overtime is worth it for you is if you already have a lot of balance in your life.
For example, if most of your waking hours are for working, then you don’t have a lot of balance.
Adding more working hours to your life won’t help you.
It can cause you to burn out, miss out on special events with your friends or family, or create distance between you and a loved one.
It can also take a toll on your mental health.
These aspects aren’t worth the extra hours.
That said, if you have a decent amount of free time or know that you can add in another hour or two at work without it impacting you, then overtime might be worth it.
Taking on extra hours won’t cause you to miss out on too much time with your family.
Most importantly, it won’t take away from the number of hours in which you sleep.
Overtime is worth it if you’re not already pushing yourself past your breaking point.
5. Career Advancement
A final reason overtime may be worth it is that you’re trying to advance your career.
This can be a risky move, however, as it can tell your employer that you’re willing to work more hours.
This might result in them advancing your career but also increasing your hours past the point you feel comfortable working.
That said, working overtime is an effective way to demonstrate to your employer that you mean business.
You’re interested in seeing the business succeed and are willing to put in the work to reach that level of success.
You shouldn’t do it too often, however, since you’re going to be costing the business more money in the long run.
Overtime can be worth it if you’re trying to impress an employer or advance further in your career.
Why Overtime Isn’t Worth It
While there are several reasons working overtime is worth the extra hours, there are also some reasons it is not worth it.
Here are a few reasons working overtime isn’t worth it.
1. Not Making Financial Progress
One reason working overtime isn’t worth it is that you find that you’re not making any actual financial progress.
No matter how many hours you add to your schedule, you’re not earning enough to make ends meet.
You can’t pay off your debt.
Your project fund isn’t increasing fast enough.
These are all signs that working overtime isn’t going to help you reach your financial goals alone.
You may need to do something else like establish a budget or find ways to consolidate your debt.
It may even be worth it trying to find a higher-paying job elsewhere.
You shouldn’t work more hours if it isn’t going to do much for your financial progress in the end, anyway.
All you’re doing is wearing yourself out.
Working overtime isn’t worth it if you’re not seeing any progress towards your financial goals.
Another reason that working overtime isn’t going to be worth it is if you have overspending habits.
Overspending is when you end up spending more than what your budget allows.
An example might be knowing that you only have $50 in your budget to splurge, yet when you go out, you find yourself spending $100 or $140 on purchases.
This is a problem that working overtime won’t fix.
It doesn’t matter how much extra money you bring home if you’re going to spend it all, anyway.
All you’re really doing is feeding the habit.
Attempting to work overtime isn’t worth it if you have a habit of overspending.
Before you waste your time, you’ll want to get your spending under control.
Then you may see some progress when you work overtime.
3. Failing Relationships
An indicator that working overtime isn’t right for you is if your relationships start to fail or grow distant.
While adding in an extra hour or two at work shouldn’t end anyone’s relationship, working beyond your means can take its toll.
When you add more work hours to your schedule, you are physically apart from your partner and family longer.
They see you less which means they don’t get to share as much with you.
You miss out on things that make you grow together as a family.
Another big cost is the emotional toll that extra working hours can bring.
After working a long day, you feel emotionally and physically exhausted.
This can impact your relationships.
You have less time to play with your kids and less energy.
You have less energy to engage in romantic activities with your partner or even to socialize with them.
If working overtime is burning you out in your personal life, then it’s time to either scale back the hours or do away with overtime entirely.
Working overtime is not worth it if it starts to impact your personal relationships.
4. Mental Health
A final reason working overtime may not be worth it is that it can impact your mental health.
There’s a reason the government limited most businesses to operating in 48-hour workweeks.
They wanted to give workers the chance to relax at home and recuperate.
Working too long and too often can make you sick.
It can also increase depression, stress, and anxiety.
If you find your mental wellness slipping because you’ve taken on more hours at work, then it’s worth limiting those hours.
Overtime does not receive a different tax rate than standard working hours.
That said, if you work a lot of overtime or you’re already on the fringe of a tax bracket, then it may push you into another tax bracket.
As a result, your gross income may receive a higher tax rate than normal.
Depending on the factors above, you may or may not find that working overtime is worth it for you.