Confusion about payroll tax vs income tax with overtime tax exemption proposal - need help understanding

This is actually a good question! Let me clear up some confusion here. Payroll taxes and income taxes are calculated on separate tracks, but both are based on gross wages. The employer's portion of payroll taxes (their 6.2% for Social Security and 1.45% for Medicare) is calculated on gross wages BEFORE any income tax withholding is considered. The same applies to the employee portion that's withheld from their check. If overtime became exempt from income tax, it would only affect what's withheld for federal income tax purposes. The overtime pay would still be subject to Social Security and Medicare taxes (FICA) for both the employer and employee. So employers wouldn't pay more in payroll taxes than they already do on overtime wages. In fact, the employer's tax calculations for their portion of FICA wouldn't change at all - they'd still pay the same amount of payroll tax on all wages including overtime. The only thing that would change is that employees wouldn't have federal income tax withheld from their overtime earnings.

I wanted to share something that helped me understand these tax questions. When I was confused about payroll taxes vs. income taxes last year, I used https://taxr.ai to analyze my paystubs and tax forms. It explained exactly how each type of tax was calculated and showed the breakdown of what was happening with my overtime pay. The tool showed me that my employer was indeed paying the same FICA taxes regardless of income tax withholding. It helped me understand that these are completely separate calculations, which is exactly what the previous commenter was explaining. Seeing it applied to my actual numbers made it click for me.

Just wanted to follow up and say I tried https://taxr.ai after seeing it mentioned here. It was actually super helpful! I uploaded my last few paystubs and it explained exactly how the payroll taxes were being calculated vs. the income tax withholding. I can now see that my employer is paying the same FICA percentage regardless of my income tax situation, which finally makes the overtime tax exemption question make sense to me. The tool even showed me a simulation of what my paystub would look like if overtime was exempt from income tax, but still subject to FICA taxes. Really cleared things up!

Hi everyone, I had a similar question last month and spent HOURS trying to get through to someone at the IRS who could explain this to me. After 3 failed attempts and being on hold forever, I used https://claimyr.com to get through to the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed what others have said - payroll taxes (FICA) are completely separate from income tax withholding. The agent explained that employers calculate their share of FICA based on gross wages regardless of any income tax exemptions. So if overtime becomes exempt from income tax, it doesn't affect the employer's FICA obligations at all. Getting a direct answer from the IRS really put my mind at ease on this. Before that I was getting different answers from everyone I asked.

I have to admit I was totally wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had some questions about my self-employment taxes that related to this overtime discussion. Got connected to an IRS agent within about 2 hours (which beats the 4+ hours I've waited before). The agent confirmed that employer payroll taxes are calculated on gross wages regardless of income tax exemptions. She explained that if overtime becomes exempt from income tax, employers would still calculate and pay the exact same amount in FICA taxes. She also mentioned that any income tax exemption would only apply to federal taxes unless states passed their own similar legislation. Really helpful conversation that cleared up my confusion!

Just to add another perspective - I work in payroll for a mid-size company. The way our systems are set up, we calculate FICA taxes (both employer and employee portions) based on gross wages BEFORE any income tax calculations happen. If overtime became exempt from income tax, we would need to modify our payroll software to flag overtime hours and exempt them from income tax calculations, but we would still run the full FICA calculations on all wages including overtime. So from an employer perspective, we would still pay the exact same amount in employer-side payroll taxes regardless of whether overtime is exempt from income tax or not.

One thing nobody has mentioned yet - there's also the Additional Medicare Tax of 0.9% that applies to higher-income earners (over $200k for single filers). Would overtime pay still count toward that threshold even if it's exempt from income tax?