Overtime and Bonus Pay: How Extra Earnings Are Calculated and Taxed

There are two common ways to earn more than your base pay: work extra hours for overtime, or receive a bonus. Both feel like a windfall, and both come with the same disappointment when the money actually arrives — the take-home is smaller than the headline. Overtime and bonuses are calculated and taxed in ways that surprise people, and the rules differ a lot depending on where you work. Understanding the mechanics turns "where did half of it go?" into a number you can predict and plan around.

How overtime pay is calculated

Overtime is paid at a premium multiple of your normal hourly rate for hours worked beyond a threshold. The most common rate is time-and-a-half (1.5×), with double time (2×) for less common situations like public holidays or unsociable hours. The basic mechanic is straightforward:

Overtime pay = base hourly rate × multiplier × overtime hours

So if you earn 20 an hour and work 10 hours at time-and-a-half, that's 20 × 1.5 × 10 = 300 for those 10 hours, versus 200 at your normal rate. The extra 100 is the overtime premium — the bit you earn purely because the hours were overtime rather than regular.

The blended rate

Once you mix regular and overtime hours, it's useful to know your blended hourly rate — your total pay for the week divided by total hours worked:

Blended rate = total weekly pay ÷ total hours worked

If you worked 40 regular hours at 20 plus those 10 overtime hours, your week is 800 + 300 = 1,100 across 50 hours, a blended rate of 22 an hour. That number is handy for comparing jobs or deciding whether the extra hours are worth it to you — though remember the figures above are gross, before tax takes its share.

Overtime rewards extra hours at a premium rate; a bonus rewards results with a lump sum. Both are real money — but both are taxed as income, so always judge them on the take-home, not the headline.

Overtime law differs sharply by country

Whether you're entitled to a premium rate at all — and at what threshold — depends entirely on where you work. This is one area where there's no universal answer.

United States

The Fair Labor Standards Act (FLSA) requires overtime at 1.5× the regular rate for hours over 40 in a week for non-exempt employees. Some states go further — California, for instance, mandates daily overtime over 8 hours and double time over 12. Whether you qualify hinges on being "non-exempt"; salaried "exempt" employees (typically those above a salary threshold in certain roles) generally aren't entitled to overtime at all.

United Kingdom

There is no statutory right to a premium overtime rate in the UK. Whether you get paid extra — and at what multiple — is purely a matter of your employment contract. The law only requires that your average pay doesn't fall below the National Minimum Wage and, under the Working Time Regulations, that you aren't forced to average more than 48 hours a week unless you've opted out. Overtime pay, when it exists, is taxed through PAYE like the rest of your wages.

Canada

Overtime is set by provincial employment standards, so the threshold varies — commonly 1.5× after 44 hours a week (Ontario), but different elsewhere. Many provinces also allow banked time (time off in lieu) instead of overtime pay by agreement. Overtime earnings are subject to the usual CPP and EI deductions on top of income tax.

Australia

Overtime and penalty rates are governed by modern awards and enterprise agreements, which set out premium rates (often 1.5× for the first few hours then 2×) and extra loadings for weekends, public holidays, and night work. Pay is also subject to the Medicare levy and, importantly, employers must pay superannuation on many forms of overtime and penalty pay.

How bonuses are taxed — and why the take-home shocks people

A bonus feels different from overtime because it lands as a single lump sum, but the tax principle is the same: it's income, taxed on top of everything you already earn this year. That's the key insight people miss. Because the bonus sits on top of your salary, it's taxed at your marginal rate — the rate on your highest band — not your lower average rate.

The honest way to work out a bonus take-home is to compare your tax with and without it:

Bonus take-home = net pay (salary + bonus) − net pay (salary alone)

This captures the true marginal cost. If a 5,000 bonus pushes part of your income into a higher band, more of it is taxed at that higher rate than your salary is — which is exactly why a bonus often feels disproportionately taxed compared with your regular pay.

Withholding is not the same as your final tax

Here's the part that causes the most confusion: the amount deducted from your bonus on the payslip is often not your final tax bill. Many countries use special withholding methods for one-off payments, which can take too much (or occasionally too little) at the moment of payment — squared up later when you file or through the rest of the tax year.

• United States: bonuses are usually withheld at a flat 22% supplemental rate (37% above $1 million), plus FICA (Social Security and Medicare). If your actual marginal rate is below 22%, you get the difference back at tax time; if it's higher, you may owe more.
• United Kingdom: PAYE often produces a one-month spike — the system can briefly treat the bonus as if you earn that much every month, over-deducting tax and National Insurance, which then corrects over the following months. NI above the upper earnings limit drops to 2%, so high earners keep more of the marginal bonus than they expect.
• Canada: the CRA's bonus tax method annualises the payment to estimate the right withholding, on top of CPP and EI — though those max out partway through the year, so a late-year bonus can be deducted differently from an early-year one.
• Australia: lump-sum payments use Schedule 5 withholding, which spreads the bonus across the year to set the rate. As with everywhere, the final position is settled when you lodge your return.

Can you reduce the tax on a bonus?

You can't avoid the fact that a bonus is taxable income, but in several countries you can divert it into a tax-advantaged account before it's taxed, deferring or sheltering the tax:

• US: direct it into a 401(k) or HSA to defer income tax (within annual limits).
• UK: bonus sacrifice into a pension avoids both income tax and National Insurance on the sacrificed amount — particularly powerful if the bonus would otherwise hit the 60% effective band between £100,000 and £125,140.
• Canada: contributing to an RRSP defers the tax to retirement, when your rate may be lower.
• Australia: salary-sacrificing the bonus into super is taxed at just 15% inside the fund instead of your marginal rate — a large saving for higher earners.

Whether that's worth doing depends on your goals and cash-flow needs, but it's the single most effective lever most employees have over a bonus tax bill.

Overtime vs. bonus: which is "better"?

They're not really competitors — most people don't choose between them — but it's worth understanding the trade-offs:

• Overtime is guaranteed for the hours worked (where the law or contract provides it) and paid at a known premium, but it costs you time and is capped by how many extra hours you can physically work.
• A bonus rewards results rather than hours and can be far larger, but it's discretionary in many roles, less predictable, and the lump-sum nature pushes more of it into your top tax band.
• Both are taxed as ordinary income — neither gets special low rates the way long-term capital gains might — so the take-home maths is what matters, not the gross figure your employer quotes.

Putting it together

Extra earnings are genuinely worth having — but only if you judge them by what reaches your account. For overtime, that means knowing your premium multiple and your blended rate, and checking whether you're even entitled to a premium where you work. For a bonus, it means understanding that it's taxed at your marginal rate, that the payslip deduction may not match your final bill, and that routing it into a pension or retirement account can claw back a chunk of the tax.

Before you bank on either, run the numbers. A couple of minutes modelling your overtime hours or your bonus take-home turns a gross figure into the real, after-tax amount you can actually spend or save — which is the only number that counts.