Working overtime to earn some extra money isn’t always worth it. In fact, it can sometimes actually set you back in the grand scheme of things. Keep reading to learn more about when working overtime isn’t worth it financially.
The basics of overtime
The U.S. Department of Labor defines overtime as any hours you put in at work above the standard 40-hours per week. A week, in turn, is defined as a period of 168 consecutive hours. So even if you work Wednesday to Sunday (as opposed to the typical Monday to Friday), regulations surrounding overtime apply.
And what are those regulations? Well, save for certain exemptions (which I’ll cover shortly), your employer must pay an overtime hourly rate equivalent to no less than 1.5 times your base hourly wage.
Exemptions, according to this document, include:
- executive, administrative, and professional employees (i.e. teachers, software engineers)
- people working at seasonal businesses
- elderly care workers
- casual babysitters
- broadcast journalists
- taxi drivers
- railroad employees
These professionals may be expected to work overtime without any special wages. Exempted salary workers often aren’t paid for overtime at all.
Still, many in these exempted positions feel working overtime is worth it – and it certainly can be. That’s not always the case, though. We’ll explore that shortly.
Myth: Working overtime is a bad idea if it would put you in a higher tax bracket
Before we look at a few scenarios in which working overtime legitimately isn’t worth it financially, let’s explore one that often comes up yet is completely bogus.
The fear among many workers is that overtime pay would put them in a higher tax bracket and therefore leave them making less than they would’ve without extra work. This belief is rooted in a fundamental misunderstanding of how North American tax rates work.
Here are the federal tax brackets for single Americans, according to SmartAsset:
- $0 to $9,875: 10%
- $9,876 to $40,125: 12%
- $40,126 to $85,525: 22%
- $85,526 to $163,300: 24%
- $163,301 to $207,350: 32%
- $207,351 to $518,400: 35%
- $518,401 and above: 37%
Many people look at these numbers and think they mean a single American earning $85,525 will hand over 22% of their total income to the government as taxes, leaving them with $66,709.5.
If the American tax system worked like this, such an employee would never want to work overtime since even $1 above $85,525 would bump their tax burden to 24%. They’d then have just $64,999.76 – more than $1,700 less than if they’d never worked overtime.
Thankfully, that’s not how America’s tax system (or Canada’s) works. Only the $1 that hypothetical employee earned above $85,525 would be taxed at 24%.
Check out this fantastic article from my friend Jesse Cramer over at The Best Interest to learn more about how progressive tax brackets work.
The gist is that you will ALWAYS end up ahead when your income increases. Because of the way progressive tax systems work, there’s no scenario in which earning more would leave you with lower take-home pay.
When is working overtime not worth it financially?
When you regularly work overtime without pay or any other discernible benefit
Many employers in industries exempt from overtime pay stipulations pay for results. They don’t care if it takes a worker 40 hours to produce those results or 50. Consequently, many workers in these professions simply work however many hours it takes for them to produce results.
This can become a tricky situation, though, when employers have unreasonable expectations that can’t possibly be met within a standard 40-hour week. They might make vague promises about promotions and bonuses but these often don’t materialize. Even when they do materialize, those benefits often amount to much less than you would’ve earned if your employer paid you fairly.
That’s why I prefer only working overtime without an immediate additional payoff if I have equity in my employer. In this scenario, I know a payoff will arrive the next time profits are distributed.
Note that I said, “prefer.” The reality is that so many people are willing to work overtime without pay or any other perk, staying competitive at your workplace often requires the same. This is far from ideal, though. Financially, you’ll hurt yourself in the long run by staying in these situations.
When you have other paid opportunities and your full-time employer doesn’t reward loyalty
I’m a firm believer in keeping your foot in a few different doors at the same time. Even if you love your current primary employer and things seem to be going well, keeping your options open won’t hurt you in the long run.
This is especially true if your primary employer doesn’t have a track record of rewarding loyalty. Even if they’ll pay you extra to work overtime, those hours might be better spent expanding your network by working at another company part-time (assuming that opportunity exists). When the time came to leave your current employer, you might be able to leverage that other part-time work into a full-time arrangement.
When working overtime would come at the cost of something you value more than immediate financial rewards
If you have higher priorities than earning more money right now, working overtime might not be a wise financial decision.
This has been my experience over the past two years. I’ve been approached with so many part-time work opportunities through my network. However, I’d rather spend my time outside of work writing for Rinkydoo Finance and learning to code. Why? Because I know those two things will be infinitely more valuable to me five years from now than earning a few hundred dollars extra per month right now.
My point here is that you need to look beyond the immediate rewards when deciding whether it makes financial sense to work overtime. You may be accepting pennies today at the cost of real life-changing money a few years from now.
When working overtime would jeopardize your performance during regular work hours
Sometimes, working overtime can make you hate an otherwise good job. Speaking for myself, there are very few things I could do for 60+ hours per week and still be excited about in two to three years. Often, I’d rather put in my 40 hours and avoid ruining a good thing.
When you’re not certain how working overtime would improve your finances
Working overtime regularly requires many sacrifices. You’ll miss out on adventures with loved ones, likely sleep fewer hours, etc.
Few things would be more demoralizing than going through all of that only to look at your finances one year from now and realize working overtime didn’t actually put you ahead. That’s what will likely happen if you don’t have a concrete plan for the extra money.
Productive uses of that extra cash would include saving, investing, and paying off debt. If you put the money towards completely discretionary junk, meanwhile, you’d likely have regrets.
How to make the most of overtime work
If you’d like to rack up those overtime house, here are some tips for ensuring you actually get ahead financially (and maintain your sanity).
Keep detailed records of what you’ve earned
If your overtime hours will be irregular, make sure you keep detailed records. Even the most dedicated payroll administrators make mistakes occasionally. When that happens, you’ll be glad you have proof of all those overtime hours.
Detailed records will also prove useful when you file your taxes. Hang onto those paystubs!
If you don’t need the money right now, consider investing it in a tax-advantaged account
As you’ll recall from the section about overtime and taxes, the government will expect its share of any dollar you earn while working extra hours (in fact, the IRS and CRA see no difference between money earned through overtime and regular income).
An exception would be made, however, if you invested that overtime pay in a tax-advantaged account, such as a 401k in the United States or an RRSP in Canada. With these two accounts in particular, the relevant tax authority would waive taxes on deposits until you withdraw the funds (ideally in retirement age, by which point you should have benefited from decades of tax-free growth).
This strategy might be useful if your living expenses leave little room for saving money from your ordinary income. You could keep your ordinary income for day-to-day expenses and use your overtime pay for long-term investing.
Just be sure to speak with an investment advisor before attempting this. There are limits on how much money you can invest in a tax-advantaged account. Exceed those limits and you’ll incur penalties.
Stick to a proper sleep schedule
Depending on your company, overtime shifts may not always follow a set schedule. If taking on overtime means you’ll need to work irregular hours, make sure your personal care routine doesn’t get crowded out.
You should still aim for eight hours of sleep every night, for example, even if that means occasionally turning down overtime. While saying no to more money might feel crazy in the moment, you’ll earn more in the long run by virtue of staying healthy.
You may even find it helpful to set certain hard rules concerning overtime. For example, you might make weekends off-limits and use them to recuperate.
Don’t abuse overtime privileges
If your company lets you work overtime at your own discretion, don’t abuse those privileges by staying back to handle unimportant tasks. Sooner or later, they’ll realize you’re not actually working overtime out of necessity and you may even lose those privileges altogether.
When is working overtime not worth it financially? Conclusion
I hope this article has helped you identify a few scenarios in which working overtime isn’t worth it financially.
To summarize, the issue has nothing to do with taxation. The progressive tax systems in Canada and the United States will never punish you for earning more money. Rather, whether or not it makes sense to work overtime boils down to compensation, your work-life balance, and what you plan on doing with the extra money.