How to Calculate Overtime: A Step-by-Step Guide

Overtime can complicate payroll quickly, especially if you're juggling multiple employee types or varying schedules. Getting it wrong could mean compliance issues—or unhappy employees.

This guide will provide a step-by-step breakdown of how to calculate overtime pay, covering the two common scenarios: time-and-a-half and double-time.

We will also briefly discuss why using automated tools is beneficial for accurately calculating payroll and show you how solutions like Paystubsnow can help generate payroll documentation like pay stubs and tax documents with ease.

Main Takeaways From This Article:

• Understanding overtime eligibility is crucial, as it depends on employee classification and hours worked beyond standard workweeks.
• Calculating overtime pay involves determining regular pay rates and tracking hours to identify overtime accurately.
• Time-and-a-half and double-time are common overtime pay structures, each affecting how you calculate additional wages.
• Avoid common pitfalls such as misclassifying employees or ignoring state-specific overtime regulations.

What Qualifies as Overtime?

Overtime refers to the hours worked by a nonexempt employee that exceed a specified threshold in a given workweek. The most common threshold, as mandated by the Fair Labor Standards Act (FLSA), is 40 hours in a seven-day workweek. Overtime is calculated on a weekly basis, not daily, so an employee who works more than eight hours in a single day but does not exceed 40 hours in that workweek will not be entitled to overtime pay under federal law.

Exempt vs. Nonexempt Employees

The FLSA categorizes employees as either exempt or nonexempt. Nonexempt employees are entitled to overtime pay, while exempt employees are not. The determination of exempt status is based on specific criteria related to an employee's job duties, responsibilities, and salary level.

Common exempt categories include executive, administrative, and professional employees who satisfy specific salary and duties criteria. Employers must correctly classify their employees, as misclassification can lead to legal and financial issues.

Types of Overtime Pay

Overtime pay can vary depending on company policy or labor laws. Below are the two most common types you’ll need to understand when calculating overtime.

Time-and-a-Half

This is the standard overtime rate mandated by the FLSA. For each hour worked beyond 40 in a workweek by a nonexempt employee, they must be paid at least one and a half times their regular rate of pay, which is the hourly rate at which an employee is normally paid.

Double-Time

Some states or company policies may require or offer double-time pay. This means employees are paid twice their regular rate of pay for total overtime hours worked under specific circumstances, such as working beyond a certain number of hours in a day, on weekends, or on holidays. This overtime premium pay provides even greater compensation for extended work hours.

How to Calculate Overtime Pay Step-by-Step

Accurate overtime calculation involves a few essential steps. Following the steps in this section will help ensure compliance and fair compensation for employees.

### 1. Determine the Regular Pay Rate

Start by identifying the employee's regular pay rate. For hourly employees, this is simple, but for salaried employees, the regular rate must be calculated by dividing their total weekly earnings by the number of hours they are regularly expected to work in a week (which is typically 40 hours).

According to the FLSA, the regular rate includes more than just the basic hourly wage or weekly salary; it also incorporates:

• Non-discretionary bonuses, such as attendance bonuses or production bonuses
• Shift differentials paid for working undesirable shifts
• Commissions earned

These additional forms of compensation must be factored into the calculation of the regular rate before determining overtime pay. Discretionary bonuses, which are not promised or tied to specific performance metrics, are generally excluded from the regular rate calculation.

2. Track Total Hours Worked

Accurate recordkeeping of all hours worked by nonexempt employees is crucial. This includes not only regular hours but also any overtime hours. Use timekeeping systems, whether manual or electronic, to maintain precise records.

Employers must also ensure that all work performed, including any work done before or after scheduled shifts, is accurately logged.

3. Identify Overtime Hours

Once you've tracked all the hours your employees worked in a given week, identify the number of hours worked that exceed the overtime threshold. This is determined by referencing federal and state laws.

Under federal law, an employee qualifies for overtime if they work more than 40 hours in a week. However, some states and cities have rules that cover overtime at a lower threshold, so always remember to check state and local laws.

4. Calculate the Overtime Rate

To find the overtime rate, simply take the regular pay rate from Step 1 and multiply it by 1.5 for time-and-a-half pay. For double-time, multiply the regular rate by 2. For example, if an employee earns $20 per hour, the overtime rate would be:

• Time-and-a-half: $20 x 1.5 = $30
• Double-time: $20 x 2 = $40

5. Multiply Overtime Hours by Overtime Rate

Finally, multiply the number of overtime hours identified in Step 3 by the overtime rate calculated in Step 4. For instance, if an employee worked 10 overtime hours at an overtime rate of $30, the overtime pay would be:

10 hours x $30 = $300

Example of Overtime Calculations

To further illustrate the calculation process, let's look at a few more examples.

Hourly Employee Example

Let's imagine that Sarah, who is an hourly employee and earns $15 per hour, has worked 50 hours this week.

• Regular Pay Rate: $15
• Total Hours Worked: 50
• Overtime Hours: 10 (50 - 40)
• Overtime Rate: $15 x 1.5 = $22.50
• Overtime Pay: 10 x $22.50 = $225

Sarah's total earnings for the week would be:

Regular Pay + Overtime Pay = (40 x $15) + $225 = $600 + $225 = $825.

Salaried Employee Example

Now, let's consider a salaried employee, John, who earns $50,000 annually and is expected to work 40 hours per week. In one particular week, he worked 50 hours.

• Regular Pay Rate: $50,000 / 52 weeks = approximately $961.54 per week.

• Regular Hourly Rate: $961.54 / 40 = approximately $24.04

• Total Hours Worked: 50

• Overtime Hours: 10 (assuming he is non-exempt).

• Overtime Rate: $24.04 x 1.5 = $36.06

• Overtime Pay: 10 x $36.06 = $360.60.

Total Pay for John that week = Regular Pay + Overtime Pay = $961.54 + $360.60 = $1,322.14.

Overtime With Multiple Rates of Pay

In some cases, employees may work different jobs at varying pay rates. If an employee works at different hourly rates during the same workweek, the regular rate of pay for overtime calculation is a weighted average of all the rates.

Let’s say Jamie works two different roles at your business in one week:

• 20 hours at $15/hour
• 20 hours at $20/hour
• Plus, 10 overtime hours at a blended rate

Here’s how to calculate her overtime pay:

• Regular Pay Rate: (20 × $15) + (20 × $20) = $300 + $400 = $700

• Weighted Average Hourly Rate: $700 ÷ 40 hours = $17.50

• Total Hours Worked: 50

• Overtime Hours: 10

• Overtime Rate: $17.50 × 1.5 = $26.25

• Overtime Pay: 10 x $26.25 = $262.50

For that week, Jamie’s total pay = Regular Pay + Overtime Pay = $700 + $262.50 = $962.50.

Common Mistakes to Avoid When Calculating Overtime

In order to accurately calculate overtime for each employee, it's crucial to understand and avoid some common pitfalls in the process:

Overlooking Off-the-Clock Work

All hours worked, even if not explicitly authorized or performed outside of scheduled hours, must be counted towards overtime if the employer knows or has reason to believe the employee is working. Failing to compensate for such "off-the-clock" work is a common violation.

Misclassifying Employee Exemption Status

Incorrectly classifying a nonexempt employee as exempt is a major mistake that can lead to substantial back-pay liabilities and penalties. Employers must carefully evaluate job duties and responsibilities against the FLSA exemption criteria.

Ignoring Multiple Pay Rates or Daily Overtime Laws

As mentioned earlier, if an employee has multiple pay rates, a weighted average must be used to determine the regular rate for overtime. Additionally, some states have daily overtime laws that require overtime pay for hours worked beyond a certain number in a single day, regardless of the total hours worked in the week. Failing to consider these nuances can lead to underpayment.

Inadequate Recordkeeping Practices

Maintaining accurate and detailed records of all hours worked is essential for accurate overtime calculations and for demonstrating compliance with labor laws. Poor recordkeeping can make it difficult to verify pay and resolve disputes.

Understanding Overtime Compliance Requirements

Overtime laws can be tricky because they exist at the federal and state levels. Let's examine them below:

Federal Overtime Laws

As previously mentioned, the Fair Labor Standards Act (FLSA) sets the foundation for federal overtime requirements, but it’s also important to understand why these laws exist and who they’re designed to protect. Enacted in 1938 during the New Deal era, the FLSA was introduced to prevent worker exploitation, limit excessive working hours, and ensure fair pay for hourly workers.

These laws primarily protect nonexempt employees, ensuring they receive additional compensation for hours worked beyond the standard 40-hour workweek. While many businesses are familiar with the time-and-a-half rule, consistent enforcement and accurate tracking are what keep employers compliant—and workers protected from wage theft or overwork.

State-Level Overtime Laws

Some states go beyond federal overtime requirements with stricter rules on when premium pay must apply. California stands out with daily overtime after eight hours worked in a day and double-time after 12 hours. It also requires double-time on the seventh consecutive workday. Alaska, Nevada, and Colorado enforce similar daily or dual-threshold rules, while Kansas and Minnesota define longer standard workweeks—requiring overtime only after 46 or 48 hours, respectively.

Certain industries—like manufacturing, hospitality, and agriculture—may also have unique overtime standards at the state level. Because these rules vary widely and are subject to change, employers should regularly consult state labor departments and always follow the regulation that provides the most protection for the employee.

Worker Classification and Documentation

Accurate classification of employees as exempt or nonexempt under the FLSA and state laws is vital to avoid substantial legal and financial repercussions. While this distinction may seem straightforward, it requires careful evaluation of each employee’s pay structure and job duties.

Exempt employees are not entitled to overtime pay and must meet all three of the following federal criteria:

• Earn a salary of at least $684 per week
• Be paid on a salary basis, rather than hourly
• Primarily perform executive, administrative, or professional duties as defined by the Department of Labor

Nonexempt employees are eligible for overtime pay and are typically hourly workers—but salaried employees may also be nonexempt if they do not meet all of the exemption requirements.

Why Use Paystubsnow for Overtime Payroll Documentation

Accurate payroll documentation is crucial for tracking employee pay, especially when overtime is involved. Here’s how Paystubsnow can simplify the process and ensure accuracy:

Simplify Overtime Calculations

Paystubsnow's platform can automate the calculation of overtime pay based on the regular rate and hours worked, reducing the risk of manual errors. By inputting the necessary data, the system can automatically apply the correct overtime premiums (time-and-a-half, double-time if applicable) and generate accurate paystubs.

Create Clear Records for Employees Paid Hourly

For employees paid hourly, Paystubsnow facilitates the creation of detailed paystubs that clearly show regular hours worked, overtime hours, the regular rate of pay, the overtime rate, and the total overtime earnings. This transparency helps employees understand their compensation and reduces potential disputes.

Support Audit-Ready Payroll Documentation

Maintaining accurate and organized payroll records is essential for compliance audits. Paystubsnow helps create and store comprehensive payroll documentation, making it easier to respond to inquiries and demonstrate adherence to federal and state labor laws regarding overtime pay.

Make Overtime Payroll Easier With Paystubsnow

Calculating overtime accurately and complying with all applicable regulations is a critical aspect of payroll management. By understanding the steps involved, avoiding common mistakes, and leveraging automated payroll calculation tools, businesses can streamline their overtime payroll processes, ensure fair compensation for their employees, and maintain compliance with labor laws.

Paystubsnow automates overtime calculations by applying the correct rates to recorded hours, reducing manual errors, and ensuring accurate paystubs. This simplification helps businesses comply with labor laws and ensures employees are compensated correctly for their overtime work.

Simplify your overtime payroll—starting today