Is Overtime Taxed at a Higher Rate in California?

Overtime pay is not taxed at a higher rate in California. The state treats overtime earnings exactly like regular wages, stacking them on top of your base pay and applying the same progressive income tax brackets. What makes overtime checks feel heavily taxed is withholding, not the tax rate itself. A new federal deduction for 2025 through 2028 can reduce the federal tax on some overtime, but California has not adopted it, and the state’s unique daily overtime rules mean many California workers qualify for less of the federal break than they expect.

How California Taxes Your Overtime

California uses a progressive income tax that runs from 1% on the lowest earnings to 12.3% on income above roughly $743,000 for single filers, with an extra 1% Mental Health Services Tax on income over $1 million that lifts the top effective rate to 13.3%.¹ Overtime does not sit in a separate category. It adds to your regular wages, and the combined total decides your bracket.

Take a single filer earning $70,000 in regular wages. That already puts them in the 9.3% marginal bracket. If $15,000 in overtime brings the year to $85,000, those extra dollars are still taxed at 9.3%, because the next bracket does not start until around $371,000.¹ Most California workers earning overtime land somewhere between 6% and 9.3% at the state level. Married couples filing jointly see wider brackets at every rate.

Federal tax works the same way. Overtime rolls into your adjusted gross income with everything else. Because it sits on top of your base pay, the overtime dollars often fall at your highest marginal rate. A single worker earning $50,000 in base pay is in the 12% federal bracket; adding $20,000 in overtime pushes the top portion into the 22% bracket. That is true of any added income, but it is why overtime paychecks feel disproportionately taxed.

Why Your Overtime Paycheck Looks So Small

The real reason overtime checks shrink is withholding, which uses shortcuts that often take out more than you actually owe.

Supplemental Wage Withholding

When an employer pays overtime on a separate check or flags it as supplemental wages, California applies a flat 6.6% withholding rate instead of calculating your exact bracket. Stock options and bonuses are withheld at 10.23%.² On the federal side, supplemental wages are withheld at a flat 22%, or 37% if your total supplemental pay for the year exceeds $1 million.³

Combined, flat withholding on a separate overtime check can reach about 28.6% in state and federal income tax before payroll taxes. If your actual marginal rates are lower, the difference comes back when you file.

The Aggregate Method

When overtime appears on the same check as your regular pay, most payroll systems use the aggregate method. The software takes your total gross pay for that period, treats it as though you earn that amount every pay period of the year, and withholds based on that inflated projection. A week with 20 overtime hours makes the system assume you earn at that pace year-round, pushing you into a higher withholding bracket than your actual annual income warrants.

The result is a smaller net check during heavy overtime weeks. It is not extra tax. It is over-withholding, and the excess comes back as a refund. Workers who earn overtime consistently throughout the year see less distortion because the annualized projection is closer to reality. Workers who hit a burst of overtime in one pay period feel it the most.

The Federal Overtime Deduction, and What California Workers Lose

Starting with the 2025 tax year, Section 225 of the Internal Revenue Code, enacted under the One Big, Beautiful Bill Act, lets eligible workers deduct the premium portion of their overtime pay from federal taxable income through tax year 2028.⁴ If you earn time-and-a-half, the “half” is deductible. The base-rate portion stays taxable.

The limits:

Maximum deduction of $12,500 per year for single filers, $25,000 for married filing jointly.⁵
The deduction shrinks by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 joint), and disappears entirely at $275,000 single or $550,000 joint.⁴
The provision expires after the 2028 tax year.⁴

Here is where California workers get squeezed. The federal deduction only covers overtime required under Section 7 of the Fair Labor Standards Act, which mandates premium pay for hours over 40 in a workweek.⁶ California law goes further, requiring time-and-a-half after eight hours in a single day and double time after twelve.⁷ Premium pay you earn under those California-only rules does not qualify.

IRS Notice 2025-69 confirms this: overtime paid based on state law rather than the FLSA is not “qualified overtime compensation.” If your employer pays double time after 12 hours, only the FLSA-required half-time premium for weekly hours above 40 counts. The additional half from California’s double-time rule does not.⁶

A California worker who regularly puts in 10-hour days but stays under 40 hours per week may earn daily overtime under state law while qualifying for zero federal deduction. Someone working five 10-hour days qualifies on the premium pay for hours exceeding the 40-hour weekly threshold, but not on the daily overtime premium for hours 9 and 10 each day. Many workers will need their employer’s W-2 reporting to sort out which portion qualifies.

California Has Not Adopted the Deduction

Even the portion that qualifies federally remains fully taxable on your California state return. California has not conformed to Section 225, so your state tax bill will not reflect the deduction at all. Overtime stays taxable at your full marginal state rate, up to 13.3%.

Exempt Employees Get Nothing

The deduction only applies to workers who are non-exempt under the FLSA. If you are classified as an exempt salaried employee, extra hours you work generate no “qualified overtime compensation,” even if your employer voluntarily pays a premium.

Payroll Taxes on Overtime

Several flat-rate deductions apply to every overtime dollar on top of income tax:

Social Security (OASDI) at 6.2% on wages up to $184,500 in 2026. Once combined regular and overtime wages hit that ceiling, no more Social Security tax is withheld for the rest of the year.⁸
Medicare at 1.45% on all wages with no cap, plus an additional 0.9% surtax once wages exceed $200,000 in a calendar year, bringing the combined rate to 2.35% above that threshold.⁹
California State Disability Insurance (SDI) at 1.3% on all wages with no cap in 2026. The taxable wage ceiling was permanently eliminated in 2024 under SB 951, so every overtime dollar is subject to SDI no matter how much you have earned.¹⁰

Because these are flat percentages, the math is simple. A double-time hour carries exactly twice the SDI and Medicare of a regular hour. For a worker earning well below the Social Security cap, overtime hours carry roughly 8.95% in combined payroll taxes on top of any income tax.

What the Combined Bite Actually Looks Like

A single California worker earning $75,000 in base pay with $15,000 in overtime premium pay faces a combined marginal rate of roughly 31% to 35% on those overtime dollars once you add state income tax (likely 9.3%), federal income tax (22%), and payroll taxes (around 8.95%). The new federal overtime deduction can meaningfully reduce the federal portion on qualifying premium pay, but California tax and payroll taxes do not change.

The gap between what gets withheld each paycheck and what you actually owe reconciles when you file. Sporadic overtime usually produces a refund. Consistent overtime, with a properly filled out W-4 and DE-4, should keep withholding close to accurate. Adjusting your allowances can keep the government from holding your money interest-free all year, but going too far means owing a balance in April.

1
California Franchise Tax Board. 2025 California Tax Rate Schedules
2
Employment Development Department. Personal Income Tax Withholding – Supplemental Wage Payments
3
Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
4
Office of the Law Revision Counsel. 26 USC 225 Qualified Overtime Compensation
5
Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
6
Internal Revenue Service. IRS Notice 2025-69 – Guidance for Individual Taxpayers Who Received Qualified Tips or Qualified Overtime Compensation in 2025
7
Department of Industrial Relations. Overtime
8
Social Security Administration. Contribution and Benefit Base
9
Internal Revenue Service. Social Security and Medicare Withholding Rates
10
Employment Development Department. Contribution Rates and Benefit Amounts