The deduction of taxes from earnings generated from hours worked beyond the standard workweek often appears higher than the deduction from regular wages. This perception arises from how income tax withholding is calculated, not necessarily from a higher tax rate being applied to the additional compensation. Consider an employee who regularly earns $1,000 per week and then earns $500 in supplemental pay for extra hours. The tax withheld from that $500 supplement often seems disproportionately large.
Understanding the system requires recognizing the cumulative nature of income tax brackets. Withholding is designed to estimate an individual’s total annual income based on their current earnings and then deduct taxes accordingly. It’s a pay-as-you-go system. The increased compensation may push the employee’s earnings into a higher tax bracket, causing a larger percentage of the income to be withheld. This system ensures consistent collection of federal and state income taxes throughout the year. The initial perception of a higher tax burden, while initially concerning, is often reconciled when taxes are filed, and any overpayment is refunded.
