OT - Question on Overtime and Taxes

[Phil Crow]

At my job, we're behind schedule right now and are working 6 9's to get the building under roof by New Year's Day. BTW, steel stud framing outside in the weather lately has been a real treat. Anyway, on to my question:

Does the rate at which one is taxed vary with time and a half or double time, or does it change with gross pay or does it not change at all? I realize that the W4 exemptions establish the basic rate, but do you pay more (percentage-wise) with overtime? I heard a story from a welder who was making $12/hr said that for 6 months he was working mandatory 50-hour weeks, then went to mandatory 60-hour weeks; his paycheck difference was only about $30. Intuition tells me that this is crazy and I've never paid that much attention to the actual amount withheld when I've worked over 50 hours (other than to cuss the federal and state governments).

Myself, I'd just as soon see income (and property and fuel etc.) tax go away entirely, but since I'm stuck with it I would at least like to know how far they're gonna ram it in before they break it off.

If anybody has some insight, I'd appreciate it.

-Phil Crow

[Doug Miller]

Changes with gross pay. The more you make, the higher the rate at which you are taxed. Overtime has nothing to do with it: suppose your base rate is $20/hour. If you work 60 hours, 40 at straight time and 20 at time and a half, you make (40 hr x $20) + (20 hr x $30) = $1400. You get taxed the same as if you had worked 40 hours at $35/hour.

-- Doug Miller (alphageek at milmac dot com)

How come we choose from just two people to run for president and 50 for Miss America?

[Doug Winterburn]

...and it's called "progressive income tax rates". If your gross pay in any pay period is extended to a yearly income, and that income bumps you into a higher marginal tax bracket than the one based on your normal number of hours, the federal tax is gonna be at a higher rate. But don't worry, that makes you rich and you don't need that extra money.

-Doug

[Renata]

What Doug said. But, let me add, that once you fill out your 1040, you should get a slight refund, since, of course, your annual gross pay isn't (e.g.) $35/hour. You Are making more money (and it May push you into a higher bracket), but you aren't grossing an Annual salary like the OT seems to make it (IOW, you aren' making 52(wks) * 40 (hrs) * (e.g.) $35 (plus the OT hours).

Renata

smart, not dumb for email

[Greg O]

He is full of it! You will get taxed at a higher rate with higher income. Overtime or regular time has nothing to do with it. Uncle Sam just looks at the dollars you make in a week, or year, more dollars, higher tax rate. Now the thing that averages it all out, when you do your taxes at the end of the year the rate is based on your total pay for the year, so it pretty much averages out the weeks you work massive over time. Think of it this way, if you normally make $1,000 a week, you get taxed at a $52,000 per year rate. If you work 4 weeks at $2,000 a week, for those 4 weeks you get taxed at a $104,000 per year rate, but when you do your year end taxes you will get taxed at $56,000 per year rate. So you will acually get tax money back for the weeks of OT. Greg

[David Hall]

Your actual tax rate charged when you file that final return sometime before April 15 generally will NOT change based on your overtime. There is a slight chance that your total income will increase to the point that you move over to a higher tax bracket, but that will apply only to the income in excess of the tax bracket break point.

That said, however, I believe that you are asking if the rate of WITHHOLDING increases in your periodic paycheck. That very well could happen for various reasons. First, your company's payroll departrment may not be very sophisticated (especially if it is a small company not using a large payroll service firm) and the withholding regulations are complex. Second, the withholding regulations generally assume that what you made during any given pay period is what you will make in ALL pay periods. This often grossly overstates your estimated ANNUAL earnings, puts you into a higher assumed tax bracket and causes the payroll dept to over withhold (this happens a lot with annual bonus situations). Consider filing a new W-4 with additional dependents for the overtime period, switch back after returning to normal hours. In any case, the amount withheld does not impact your actual taxes. It only impacts the size of your refund or additional payment when filing your return. If they take more, the refund is higher (and you gave Uncle Sam an interest free loan). If they take less the refund is smaller or you may owe at year end. If that is the case, don't spend it all before tax time - Uncle Sam doesn't pay interest on those "loans" but he sure charges interest and penalties if you don't pay on time.

Dave Hall

[Dan Brown]

[e-mail] (Phil Crow) wrote in news: [e-mail]:

Changes with gross pay, as has already been posted. However, _bonuses_ have tax withheld at a higher rate, 40% IIRC. Where I work, our "overtime" is treated as a bonus (has to do with the fact that we're sort of salaried, sort of hourly), so tax is withheld from that at a higher rate. The actual tax rate isn't any higher, but for some reason the withholding rate is. We get most of that back at the end of the year; just have to wait for it.

[Mark]

Me thinks your employer is scamming you.

[Clarke Echols]

The tax withholding rate is based on a formula where:

Gross pay in any given pay period times number of pay periods per year equals an estimated annual income. Based on your W-4 exemptions, the withholding is estimated to be roughly equal to that pay-period's portion of your total tax bill for the year.

The hook is that if you get paid 2 times/month, that's 24 paychecks per year. If you make $10/hr times 40 hours per week, that's about $935 gross per half-month (based on 187 hours per average month at

40 hrs/week). Thus a $935 gross paycheck calculates to an annual income of about $22,440 per year.

On the other hand, if you work an extra 20 hours per week for a month, your income goes up by 75%, or $1636 gross per check. That then looks to the IRS withholding formula like you are making $37,270.

Let's say you are married and your exemptions and deductions are about $12,000 per year, so your taxable income is about $10,000. The tax on that would be somewhere around $1300-1500 per year. BUT, if you had the same deductions and made $37,270, your taxable income is $25,000 per year, and the tax on that is closer to $4000 per year, and the withholding for federal income tax per check with overtime would be close to $175 instead of $50. Add to that the additional social security tax of $55 or so for a total increase of federal taxes of $180 plus additional state income tax, and that knocks a big hole in your overtime income.

It's a screwed-up system, but it's the only game in town.

CE

[Bernie Hunt]

As an employer who does his own payroll, I suspect they are blanket taxing the bonuses at 40% to keep from having to figure them through the tax tables, consider each employees withholding status and them making an IRS deposit each time they write bonus checks. In our business, we add the bonuses into the regular paychecks to cut down on the caclulating overhead and extra deposits to the IRS.

Bernie

[Jay]

It seems many people know all about the tax rules, but what bothers me is Phil's comments on taxes going away. If we don't pay taxes, who paves and fixes roads, who pays for the fire engines and crews that come and attempt to save your house and personal belongings, who pays for the cops that protect you as best they can, who brings water to your house, takes used water and waste away from your house, etc. This would be a sorry country if we didn't have taxes. I agree that taxes are wasted much of the time, but if we didn't have them, we wouldn't have much. My 2 cents.

[Doug Winterburn]

All the things you mentioned are paid by city/count/state (local) taxes, not Federal Income Tax - at least that's the way it's supposed to be. Federal taxes are supposed to pay for the military/defense and commerce/trade related things - at least that's the way it's supposed to be.

-Doug

[Doug Miller]

I didn't read that as advocating the abolition of *all* taxes, just *certain* ones.

He's right IMO about most of them. I'd like to see all taxes abolished except sales tax. Main reason? It's the _only_ way of taxing illegally-earned income. Sure, there might be one or two drug dealers somewhere who actually report their income on a 1040, but depend on it, they're in a tiny minority. So how do you tax these guys? Get 'em when they spend it.

-- Doug Miller (alphageek at milmac dot com)

How come we choose from just two people to run for president and 50 for Miss America?

[Charlie Self]

Doug Winterburn responds:

"Supposed to be" is right up there with "justice" as a concept, I think. We don't see many things done as they're supposed to be done, nor is justice done with any great regularity.

It would be interesting to see just how schools would fare today if all Federal monies were cut off. Too, how many roads would we have without Federal support? Start by doing a wipe on the entire Eisenhower concept, the Interstates.

Charlie Self

"Man is a reasoning rather than a reasonable animal." Alexander Hamilton

[Doug Winterburn]

All you gotta do is look at the trucking traffic on the interstates (at least in the west) to realize they are a valid commerce item, unlike Social Security and Medicare which for some strange reason have been justified under the commerce clause. OTOH, I expect local taxes to fully fund my side street after I have had a chance to vote on the bond issue.

-Doug

[Nova]

The "interstates" were supposedly constructed for military purposes.

-- Jack Novak Buffalo, NY - USA (Remove "SPAM" from email address to reply)

[Doug Winterburn]

Correct, military, commerce and travel:

[todd]

The standard answer on that is that sales taxes are a very regressive way of collecting taxes. I don't necessarily disbelieve that, but I wouldn't mind seeing the data that backs that up.

todd

[Charlie Self]

todd responds:

Shouldn't be all that difficult, from what I'm told. A 20-25% sales tax on just about everything is going to do one helluva whack job on the grocery bills for poor households and be almost unnoticed in wealthier households. Same on essential clothing, fuel, similar items.

At the same time, it seems to me that the wealthier households will actually pay far more taxes than is now the case, because everything that is bought will carry a sizeable tax load, grabbing money that may come from low tax or untaxed sources. People with more money buy more, period. The guy who pays $300,000 for a Ferrari, though, is well able to afford the extra load (the assumption goes), while the poorer person who pays, say $12,000 for a Kia cannot afford another 25% and will not benefit commensurately with the reduction or elimination of income tax.

Taxes are a crapshoot, it seems to me. Whether it's single tax, sales tax, graduted income tax or some other scheme, some taxpayers are going to get screwed, or, at the very least, feel like they're being screwed.

And I don't see any single tax schemes ever passing. If one did, what would happen to the 175,000 or so IRS employees, not to mention the boxcar loads of bookkeepers and CPAs who are tax specialists. Or even the semi-trained types who get it wrong when you take your tax records to H&R Block.

And you always have the taxpayer who swears up and down he NEVER uses anything any government supplies, so shouldn't have to pay taxes.

Charlie Self

"Man is a reasoning rather than a reasonable animal." Alexander Hamilton

[David Hall]

Federal support for schools is very small. In my District less than 1% of total spending is federally funded. Roads are built by the feds from federal gas taxes. We could build just as many roads if the feds went away and the state levied the additional gas tax - we just wouldn't be able to funnel it to those states and districts with the "right" legislators and senators. A case in point is your Senator, Bob Byrd, and all the road money he brings to WV. That extension of RT 50 being built in Parkersburg comes to mind.

Dave Hall