Overtime Pay: How It's Worked Out and Why the Tax Looks Higher

You stayed back for a long Saturday, did the sums in your head and pictured a noticeably bigger pay. Then the payslip arrives, the overtime is there, and a surprising chunk of it has gone in tax.

A larger tax deduction doesn't necessarily mean a mistake. Your award or agreement sets the overtime rate, and tax follows the same rules as the rest of your pay. Seeing how both work makes the payslip easier to check, and the extra easier to plan.

When extra hours count as overtime

Overtime is work beyond ordinary hours. An award sets minimum conditions for an industry or job; a workplace agreement can set different conditions. Under most awards, overtime starts past a daily or weekly maximum, usually 38 hours a week for full-time employees. It can also mean hours a part-time employee works beyond their agreed hours, or work outside the span of the day when ordinary hours can be worked, such as late at night.

The details differ by award and agreement, so the first step is finding yours. Fair Work's Pay and Conditions Tool works out overtime rates for your award, and our award rates guide helps you find yours.

An employer can ask for reasonable overtime, and you can refuse overtime that's unreasonable. Your safety, your family responsibilities and how much notice you were given all count towards what's reasonable.

How overtime rates are worked out

Time and a half is 150% of the rate your award or agreement uses. Double time is 200%. Many awards pay time and a half for the first two or three hours and double time after that, with higher rates on Sundays and public holidays.

Under the General Retail Industry Award, for example, full-time and part-time overtime from Monday to Saturday is 150% for the first three hours and 200% after that. It's counted day by day, so the first three hours of each day's overtime start at time and a half again.

Kai, who's made up, is 22 and works full time at a hardware store covered by that award. Kai earns $30 an hour for a 38-hour week, and the employer works out overtime from that rate. One Saturday, after a full week, Kai works a five-hour stocktake.

Five overtime hours pay more than eight ordinary hours would. Your payslip has to show amounts like overtime that sit apart from your ordinary rate, so you can check the hours and rate against your own record. Our payslip guide shows where to look.

Why more tax comes out of an overtime pay

Kai is paid fortnightly. An ordinary fortnight of $2,280 has $366 withheld, taken out by payroll and sent to the tax office towards Kai's income tax. The fortnight with the stocktake comes to $2,535, and $448 is withheld: $82 more, from $255 of overtime.

Income tax is worked out in brackets, slices of the year's income each taxed at its own rate, and Kai's usual pay already reaches the slice taxed at 30 cents in the dollar, plus the 2% Medicare levy. The extra also slightly reduces Kai's low income tax offset, a reduction in income tax for lower earners. The pay as a whole averages less tax because its first dollars sit in lower slices. Our guide to tax brackets shows each slice.

Payroll doesn't know the stocktake was a one-off. The withholding tables work from the total you're paid in each period, overtime included, and estimate tax as if every pay looked like this one. Our guide to take-home pay explains withholding in more detail.

Whether any of it comes back

For Kai, the $82 withheld is close to the extra annual tax, so this shift alone doesn't create a refund.

It's different when one big pay makes payroll assume a much bigger year than you have. If you usually earn little, a single fortnight of overtime can be withheld as though you earned that every fortnight. Your tax return later works out the tax on what you actually earned across the year, and anything withheld beyond that comes back as a refund. Our guide to your first tax return walks through how that's settled.

Choose where the extra goes

Kai takes home $173 from the stocktake. On payday, you can choose whether the extra goes towards a bill, a quieter fortnight or a goal.

Clova is a budgeting app for planning each pay across bills, spending and goals.

If your hours swing a lot from pay to pay, our guide to budgeting on an irregular income shows how to plan around the quieter fortnights first.

Checking your overtime is right

Keep your own record of the hours you work, including the start and finish of any overtime. If your payslip doesn't match it, payroll is the first place to ask, and the Fair Work Infoline on 13 13 94 can help if it isn't sorted out. Overtime is your time, and being paid properly for it is a reasonable thing to check.

A note from us

An overtime pay can feel smaller than the effort that went into it. We are building Clova so you can plan where the extra take-home pay goes.