There is no such thing as an "overtime tax" – all income, whether you earn it during regular working hours or overtime, is taxed the same.
If overtime pay happens to push your overall income into a higher tax bracket, the portion of income falling into that higher bracket will be taxed at a higher rate. The rest of your income sitting in the lower tax bracket gets taxed at a lower rate.
That’s right, it all boils down to taxes. Working more hours means more wages and a bigger paycheque, and a bigger paycheque means more taxes.
Key Takeaways
- Any income earned as overtime isn't taxed any differently than regular pay.
- If overtime pay pushes your overall income into a higher tax bracket, only the portion of your income in that higher tax bracket will be taxed at the higher rate.
- Whether working overtime is worth it or not is up to you – so long as extra work doesn’t endanger your mental and/or physical health, it may indeed be worth it.
What's considered working overtime?
Overtime hours are anything that you work over 8 hours in one day or 40 hours in one week.
When you work more than regular hours, a different rate of pay begins – typically 1.5 times your regular rate of pay, or "time and a half."
But in some areas (Newfoundland and New Brunswick), overtime is calculated using minimum wage, so it’s important to check the regulations for your province.
It should also be noted that averaging agreements or modified work schedules may impact overtime pay rules. This should be in your employment agreement.
Working overtime results in different taxes… right?
Overtime hours aren't taxed any differently than regular hours.
At the end of each calendar year, employers are required to file T4 slips for all employees showing the total wages paid (along with income tax deductions, CPP, EI, etc).
Overtime hours are lumped in with regular hours and both are included in the total employment income earned for the year. Employees then fill out their tax return the following year using the amounts on the T4 slip.
The only tax detail that overtime hours can affect is your tax bracket.
Tax brackets and working overtime
Tax brackets are segments of income that are taxed at different rates.
Simply put, the higher your total annual income, the more your income is taxed. And as you're paid more, you move up into a higher tax bracket.
Tax bracket amounts are adjusted for inflation by the federal government. The highest tax bracket (federal only) is 33%, which only applies to income above $246,752.
Here's what the federal tax brackets are for 2024:
| Taxable Income (Range) | Tax Rate |
|---|---|
| $0 - $55,867 | 15% |
| $55,867 - $111,733 | 20.5% |
| $111,733 - $173,205 | 26% |
| $173,205 - $246,752 | 29% |
| $246,752+ | 33% |
Keep in mind that tax rates are only charged on the portion of your income that's within a certain bracket.
For example, if you make $56,262 a year, you'll pay 15% taxes on the first $55,867, then 20.5% on the $395 that exceeds the range. So instead of paying $8,439.30 (if you paid 15% on the entire amount), you'd pay $8,461.03 – a small difference of $21.73.
Working overtime doesn’t necessarily mean you'll be in a higher tax bracket – it just means your rate of pay is higher. So it'll take you less time working to earn the same amount of money than if you had worked regular hours.
Marginal vs. average tax rates
To fully understand this concept, you need to be familiar with the concepts of marginal tax rates and average tax rates.
The average tax rate is the percentage of total tax you pay on your income. Your income amount can span several tax brackets, and you might be charged a withholding tax, capital gains tax, etc. To better understand your overall tax burden, you can look at your average tax rate instead of each type of tax individually.
On the other hand, the marginal tax rate is the tax you pay on any income earned that falls into a higher tax bracket – these last dollars decide which tax bracket your income falls into. As your income increases, you may be bumped into a higher tax bracket. In this case, the marginal tax rate would go up too.
The biggest distinction to note here is that the marginal tax rate is what you'd pay on any portion of income earned that falls into a higher tax bracket. The average tax rate is the tax paid for your total income for the year.
Taking all of this into consideration, you'll see that although you pay more taxes on that extra money earned from overtime, your marginal tax rate won't necessarily change.
When reviewing your income for the year and filling out your tax return, your average tax rate is more relevant than marginal because the average tax rate is for all income for the year. Your marginal tax rate only applies to the portion of your income that pushes your overall income into a higher tax bracket.
So is working overtime worth it?
As far as taxes are concerned – yes, working overtime is worth it.
Earning a higher rate of pay doesn’t necessarily mean you'll be in a higher tax bracket, it means your taxable income will increase for the year.
Let's take a look at an example
Let’s say someone earns $55,000 for the year in addition to $5,000 of overtime pay – for a total of $60,000 in taxable income for the year.
For federal taxes, the first $55,867 of income will be taxed at 15% and the remaining $4,133 will be taxed at 20.5%.
It’s true that $4,133 of the overtime pay is taxed at a higher rate in this case, but it’s better to earn (and pay taxes on) income than not earning the income at all.
Basically you'll pay $977.32 for the $5,000 extra dollars you made – still putting you $4,022.68 in the green.
Working overtime and the overtime tax myth
So, why do so many people think you have to pay higher taxes on money earned in overtime? The overtime tax myth may have come from sources that only look at marginal tax rates while not considering average tax rates.
It’s true that if you earn enough additional income, you'll eventually go into a higher marginal tax rate. But it’s important to note (again) that only the additional earnings that fall within the higher bracket are taxed at a higher rate. Everything else stays the same.
How to do your taxes
If you’ve been working overtime, be sure to choose a reliable tax software. Some tax apps calculate the tax rate for a certain week of pay, instead of averaging it out over the year.
We recommend using Intuit TurboTax – in addition to their 100% accuracy guarantee, the app will automatically help you search for rebates you might not have realized you qualify for. You can even import your T4 directly from the CRA.
Of course, if your tax situation is a little more complicated, it’s usually worth consulting a tax professional.
Want to learn more about tax software in Canada? Check out our reviews:
FAQ
Is overtime worth it?
Whether or not it's worth it to work overtime depends on many factors. The biggest consideration should be your health – working too many hours and not getting enough rest can be detrimental to both your mental and physical health.
Is overtime taxed at a higher rate?
Your overtime hours are taxed in the same way as your regular hours. If your overtime earnings do put you into another bracket, you'll only pay extra taxes on those dollars within the higher bracket.
Why is overtime taxed higher than regular income?
If overtime income does bump you into another tax bracket, you'll only pay more tax on the amount of your income that's within the higher bracket. This is related to the concepts of marginal tax rate and average tax rate.
Can I refuse to work overtime?
The Canadian Labour Code states that employees can refuse to work overtime in certain circumstances. However, some individuals with certain jobs aren't legally able to refuse overtime, such as those in commission-based positions in the banking and/or broadcasting industries.
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