How to calculate overtime pay for hourly and salaried employees

A regular task that employers must perform is calculating overtime pay for their employees. And depending on your state, industry, and how you run your business, you may occasionally have to calculate overtime pay for hourly and salaried employees.

Our guide will walk you through everything you need to know about overtime pay, how to calculate it, and critical mistakes to avoid.

• What is overtime pay?
• Updates to overtime regulations in 2021
• Overtime pay lawsWho is exempt from overtime pay?
• State overtime pay regulationsStates where overtime is based on hours worked in the day
• States where overtime is based on hours worked in a week
• How to calculate overtime pay for hourly employees
• Example 1: Hourly wage
• Example 2: Hourly wage and nondiscretionary bonus
• Example 3: Employee with multiple pay rates
• How to calculate overtime for salaried employeesExample 1: Non-exempt employee with fixed work schedule
• Common overtime mistakes employers make
• Conclusion

What is overtime pay?

Overtime pay is additional pay that’s owed to employees when they work more than the agreed-upon number of hours in their contract, or over full-time. For example, if an employee works 45 hours one week—instead of the standard 40—you may owe them 5 hours of overtime pay.

Overtime pay is often more than the regular hourly rate, too. A common rule is that overtime pay must be 1.5 times the regular rate of pay—commonly called “time and a half.” So, if your employee earns $20 an hour, their overtime rate would be $30 per hour. This counts even if they have only worked part of a full hour.

Updates to overtime regulations in 2021

On the federal level, there was a major update in 2020 that still applies to workers in 2021. The Department of Labor requires that workers earning under $35,568 be paid overtime if they work more than their usual hours—including managers. Salaried employees over this threshold, however, can be overtime exempt.

Many overtime laws can vary from state to state. For instance, some states have a minimum salary for overtime-exempt employees. California, for instance, requires that overtime-exempt salaried employees make twice the full-time minimum wage. And, as the minimum wage increases each year, so does the minimum salary.

Other states may have different regulations that change each year. Your state may have implemented a minimum salary for overtime-exempt employees, or the minimum pay for overtime work may have increased. If you’re uncertain whether there were any changes, be sure to look up the laws specific to your state.

Overtime pay laws

The Fair Labor Standards Act (FLSA) governs overtime pay. It requires that eligible workers who work more than a 40-hour week be paid 1.5 times their base pay rate for every hour worked over their usual amount. This doesn’t necessarily apply to work performed on nights, weekends, and holidays, unless mentioned in the employment agreement—or if those hours are also in excess of 40 for that week. Certain states may require that employers pay an overtime rate on some holidays, however.

Note: Workers whose employer has had them work overtime without compensating them as legally required (federally and for their state) can file a complaint through the Department of Labor. This can help workers recuperate the earnings that their employer wasn’t paying them.

In some states, employers may also owe employees double overtime in some cases. Double overtime may be owed if employees work more than 12 hours a day. However, laws can vary by state or by the agreement signed when accepting employment, so double overtime may not always apply.

Who is exempt from overtime pay?

It’s also important to note that not all workers are FLSA eligible. For example, certain salaried employees over a certain threshold—as mentioned before, the national threshold is $35,568—may be ineligible. Independent contractors and freelancers are also ineligible for overtime in most cases.

• For more detailed information about each state’s overtime laws, check out our state-by-state guide to overtime pay.

In order to stay compliant with the FLSA, it’s important that you keep tabs on which employees in your organization are eligible for overtime pay. For example, say you have a salaried employee making $45,000 per year, a team of freelancers you regularly contract with, and an hourly employee who makes $32,000. Of those three, at least as far as the FLSA is concerned, only the last employee—the one making $32,000—is eligible for overtime pay.

State overtime pay regulations

Let’s consider the example above again. In some states, such as California, the employee making $45,000 is still eligible for overtime, even though the FLSA doesn’t require them to be. That’s because state laws can differ on who exactly is eligible.

There are two ways that states track overtime pay: based on hours worked in a day, and hours worked in a week.

States where overtime is based on hours worked in the day

These states and territories require that employees be paid overtime if they work over a certain number of hours in a single day:

• Alaska
• California
• Nevada
• Puerto Rico
• The Virgin Islands
• Colorado (in some cases)
• Oregon (in some cases)

States where overtime is based on hours worked in a week

The remaining states require overtime pay based only on the number of overtime hours worked in a week. So, if an employee worked 10 hours on Monday, 6 hours on Tuesday, and 8 hours on Wednesday, Thursday, and Friday, their employer wouldn’t owe them overtime pay.

This is different from the states mentioned above, which may require overtime pay for the 2 extra hours worked on a 10-hour day.

How to calculate overtime pay for hourly employees

It may seem like overtime is just the employee’s regular hours plus time and a half for overtime, but it can be a little more complicated. Review these examples to learn more about the different overtime rules that may apply.

Example 1: Hourly wage

Calculating overtime pay for hourly wages can be pretty simple. Just make sure you note whether your state counts overtime on a daily or weekly basis before determining the amount you owe your employee.

Let’s say that your employee worked a 45-hour week. Once you know how many hours you owe them, here’s how you calculate the money you owe:

• Step 1. Regular pay rate x 40 hours = regular pay
• Step 2. Regular pay rate x 1.5 x 5 hours = overtime pay
• Step 3. Regular pay + overtime pay = total owed

Example 2: Hourly wage and nondiscretionary bonus

If you offer an employee a bonus for completing a task that takes longer than their 40-hour workweek, you may owe overtime pay for the time they spent on the task. The DOL website shows how to calculate the amount due to an employee who worked a 43-hour week with a $50 bonus. Below is an example of the calculation.

• $15.00 per hour x 43 hours = $645.00 — the employee’s compensation without any bonuses or overtime factored in yet.
• $645.00 + $50.00 (bonus) = $695.00 — the employee’s total compensation when you’ve added the bonus to the hourly pay
• $480.00 / 43 hours = $16.16 — this describes what their hourly rate can be described as once you have factored in the bonus they received.
• $16.16 x 0.5 = $8.08 — overtime is usually time and a half, so to find out what time and a half is, use the new hourly rate and multiply by 0.5, then add that to the base pay for the hours they worked overtime.
• $5.58 x 3 overtime hours = $24.24 — this is the final amount of overtime due
• $695.00 + $24.24 = $718.24 (total due) — lastly, add together the overtime and original totals to find what their total earnings are.

Example 3: Employee with multiple pay rates

Some employees might work different shifts with different rates of pay—or they might even have two different positions with two different rates. To calculate this rate, the DOL stipulates that employers use a blended, weighted average. Let’s say your employee worked 10 hours on two jobs: one at $10 an hour for 8 hours, then another at $12 an hour for 2 hours. (Suppose you’re also in a state that uses daily overtime.)

• ($10 x 8) + ($12 x 2) = $104
• 104 / 10 = 10.4
• 10.4 x 0.5 = 5.2
• 5.2 x 2 = 10.4 (total of 2 overtime hours)
• Base pay ($104) + overtime pay ($10.4) = $114.40 total pay owed

How to calculate overtime for salaried employees

The overtime calculations that must be performed for salaried non-exempt employees, luckily, are not too complicated. Here’s an example.

Example 1: Non-exempt employee with fixed work schedule

Overtime pay for salaried employees can seem tricky to calculate, but it’s actually fairly simple. One way to do it is to divide their weekly pay by the number of hours they work in a week. For instance, let’s say they make $800 a week and work 40 hours per week. Then, they worked 5 overtime hours.

• $800 / 40 = $20 an hour
• 5 OT hours x $20 an hour x 1.5 = $150 OT pay
• Total pay = $950
• The same process can be done by dividing the number of hours they work in a year by their yearly salary, then repeating the above calculation.

Common overtime mistakes employers make

Overtime can be complicated, so it’s no wonder that many employers make mistakes. In fact, mistakes in calculating and correctly assessing payroll account for $8 billion in theft from workers annually in the top 10 most populated U.S. states alone.

Payroll mistakes that violate labor laws could lead to investigations from the DOL, legal action, and even lawsuits. That’s why it’s best to avoid mistakes like these:

• Averaging hours. If an employee works 45 hours one week, then 35 the next, you may be tempted to average this to 40 total and not pay overtime. But this is incorrect—the employee is still owed 5 hours of OT pay for the first week.
• Not paying overtime for unauthorized overtime. Even if you didn’t authorize an employee to work overtime, they still must be paid their overtime rate for time worked over 40 hours a week.
• Undercounting time worked. It’s best to use a system that carefully manages and tracks time spent at work to avoid this mistake. Missing hours that your employee worked is theft.
• Calculating overtime pay based on hourly rate only. If your employee does earn nondiscretionary bonuses, their OT rate must be based on their hourly rate + the amount from those bonuses.
• Not following state laws. Remember, not every state’s employment laws work the same. It’s important to know your particular state’s laws so you avoid OT mistakes on payroll.
• Thinking employees may wave OT rights. Employees can’t waive their rights to overtime. If they work more than 40 hours a week, they must be paid an overtime rate.

Often, employers may just accidentally pay the employee’s regular rate for their weekly salary, forgetting to account for overtime hours. That’s why keeping track of your employees’ hours of work in each pay period—as well as exemptions, double time, and state and federal laws—is critical.

Conclusion

From overtime and bonuses to paying and filing taxes, payroll can be a hassle. The important thing to remember is that you stay on top of your various payroll responsibilities in real time. That way, no matter which tricky overtime pay calculations you have to deal with, you can avoid serious mistakes, like underpaying employees or failing to follow your state’s laws.

QuickBooks Payroll makes keeping track of your organization’s pay simple. With easy-to-read time sheets and reports, invoice processing, and direct deposit capabilities, ensuring you’re compliant and paying your employees responsibly can be much simpler. Download QuickBooks today to see how our payroll and other business accounting solutions can help your business excel.