How To Calculate Overtime: A Step-By-Step Guide

Knowing how to calculate overtime correctly can have a significant impact on your business’s work schedule and budget. This is an essential skill for all managers to master.

Even if you send employee timesheets to another company for processing, it’s good to know the overtime formulas. Why?

Without at least a cursory knowledge of overtime calculations, it’s all too easy to overschedule your employees to the point that you then have to pay them extra. Do that enough, and you’ll break your business labor budget and send your bottom line into the red.

In this article, we discuss how to calculate overtime so you can keep your spending under control.

Overtime Defined

Overtime is defined as any time an employee exceeds 40 hours of work in a seven-day period.

The federal government established this as law in the Fair Labor Standards Act (FLSA) of 1940. Before that, employers could require their employees to work any number of hours at their regular pay rate.

But after the FLSA went into effect, employers could only require their employees to work 40 hours per week at their regular pay rate. Above 40 hours, employers now have to provide extra compensation in the form of overtime pay.

In addition to the 40-hour workweek, the federal government also established the standard overtime rate: 1.5 times the employee’s regular hourly wage (a.k.a. time-and-a-half).

That said, the overtime rate set by the government is just the minimum businesses have to pay their workforce for any overtime accumulated. A business could set its overtime rate at any number as long as it does not drop below 1.5 times the employee’s regular hourly wage.

Overtime And Your Payroll Process

A big part of learning how to calculate overtime correctly is understanding where and how it fits into the larger framework of your payroll process.

That involves answering such questions as:

• Is the employee exempt or non-exempt (i.e., eligible for overtime pay)?
• What is the employee’s regular rate?
• How much do you pay for overtime work?
• What are the federal, state, and local laws that regulate overtime for your business?

We’ll discuss two of those points in the next few sections, but if you have any questions about the laws that regulate payroll and overtime, consult a qualified accountant or attorney who knows your industry.

Exempt Vs. Non-Exempt

Not every employee will be eligible to receive overtime pay. It all depends on which of two categories you put each team member in: exempt or non-exempt.

Businesses that pay their employees a salary (as opposed to an hourly rate) typically classify those employees as exempt — meaning that they’re not eligible for overtime.

Businesses that pay their employees by the hour typically classify those employees as non-exempt — meaning that they are eligible for overtime.

But even that general rule isn’t always true because some employees don’t qualify for overtime even if you pay them by the hour. It all depends on how you set up your business and why it’s so important to talk to an accountant or attorney.

Overtime eligibility also depends on some new legislation passed in January 2020 that says:

An employee paid $684 or more per week is not eligible to accumulate overtime hours. In addition, a “highly compensated employee” (HCE) who makes $107,432 or more per year is not eligible for overtime either.

It’s easy to see that trying to figure out how to calculate overtime for each employee can be a confusing and difficult task.

Talk to a lawyer or payroll professional if you’re unsure how to proceed.

Your Overtime Pay Rate

Your business may pay whatever overtime rate it chooses as long as that rate doesn’t fall below the minimum 1.5 times an employee’s regular pay rate (i.e., time-and-a-half) set by law.

A common example of this is holiday pay. During major U.S. holidays (e.g., Christmas, Thanksgiving, and New Year’s Day), some businesses pay “double time” (or twice the regular rate) for any overtime hours worked.

This extra pay is merely an incentive (or reward) for working days (or hours) that the employee would usually spend off.

If you wish, you can set your overtime pay rate at 1.6, 1.8, or even 2.5 times the regular rate if that works best for your team and your business.

Another point to keep in mind about overtime pay is that it’s based on an employee’s regular rate (a.k.a. regular pay rate). We’ve mentioned that already, but it’s important to have that number on hand before learning how to calculate overtime for specific employees.

How To Calculate An Overtime Rate

As we mentioned, the federal government set the overtime rate at 1.5 times regular hourly pay.

There is, however, another formula that yields the same overtime rate. This alternate formula can be useful in certain circumstances, which is why it’s important to know how to use it.

In the next two sections, we’ll introduce you to the two formulas that will help you learn how to calculate overtime for your employees.

Formula #1

The most basic way to calculate an employee’s overtime pay rate involves two numbers: regular hourly pay rate and the 1.5 multiplier set as the minimum standard by the federal government.

Here’s the formula that uses these two numbers:

Overtime Pay Rate = Regular Hourly Pay Rate x 1.5 (Overtime Multiplier)

So, for example, if you have an employee whose regular pay rate is $12 per hour, to find their overtime pay rate, you’d plug $12 into the formula above.

Overtime Pay Rate = Regular Hourly Pay Rate x 1.5 (Overtime Multiplier)
Overtime Pay Rate = $12 per hour (Regular Hourly Pay Rate) x 1.5 (Overtime Multiplier)
Overtime Pay Rate = $18 per hour

For any hours over 40 that this employee works during a seven-day period, you would be required by law to pay them at a minimum rate of $18 per hour.

Before we delve into more details about how to calculate overtime using that overtime pay rate, let’s discuss the second formula you may need.

Formula #2

As you’ll see in the next section, some methods for calculating overtime lump all hours worked together and then use the difference between the regular hourly pay rate and the overtime pay rate to figure gross pay.

That involves a slightly different formula than the one mentioned in the previous section.

Overtime Pay Rate = Regular Hourly Pay Rate x 0.5

Here are the numbers you get when you use this formula (using the same $12 per hour example from the previous section).

Overtime Pay Rate = Regular Hourly Pay Rate x 0.5
Overtime Pay Rate = $12 per hour x 0.5
Overtime Pay Rate = $6 per hour*

*Notice that the regular hourly pay rate of $12 per hour plus the overtime pay rate of $6 per hour equals the $18 per hour we calculated in the previous section.

This rate should only be used in certain circumstances because it’s half of the employee’s regular hourly pay rate. If you were to pay all overtime hours on their timesheet with this dollar amount, the employee wouldn’t receive the correct wages required by law.

For the majority of the methods for calculating overtime, you’ll use formula one (the 1.5 overtime multiplier). But let’s see how to calculate overtime using total hours worked and formula two.

How To Calculate Overtime: 2 Scenarios

To help you understand the formulas and the data they produce, we’ll use a hypothetical employee named Robin as an example. Here are the numbers we’ll use:

• Robin’s regular pay rate is $12 per hour
• Robin’s normal work period is 40 hours per week
• During a particularly busy time, Robin worked 58 hours in one week
• The overtime rate for your business is the minimum set by the federal government (1.5 times the regular hourly rate)

With those numbers in mind, let’s walk through the first method.

1) Total Hours

Step #1: To learn how to calculate overtime using the total hours worked, start by calculating base pay for the total time recorded on Robin’s timesheet.

Base Pay = 58 hours (Total Worked) x $12 per hour (Regular Pay Rate) = $696

That number, however, only takes into account Robin’s regular pay rate. It doesn’t include any extra for overtime.

Step #2: To find the overtime Robin is due, use formula two from the previous section.

Overtime Pay Rate = $6 per hour

Step #3: You then find the overtime hours worked and multiply it by the overtime pay rate.

Overtime Hours = 58 hours (Total Worked) – 40 (Standard Work Week)
Overtime Hours = 18

Overtime Pay = 18 hours (Overtime) x $6 per hour (Overtime Pay Rate)
Overtime Pay = $108

Step #4: Finally, you add together the base pay and the overtime pay to find the total gross pay Robin earned for the week.

Gross Pay = Base Pay + Overtime Pay
Gross Pay = $696 + $108
Gross Pay = $804

2) Separate Hours

Step #1: Separate the total time Robin worked into regular hours and overtime hours.

Overtime Hours = Total Time Worked – Regular Work Week
Overtime Hours = 58 hours (Total Time Worked) – 40 hours (Regular Work Week)
Overtime Hours = 18

That calculation may seem very basic (which it is in this instance), and you may be wondering why we included it.

Here’s why: Sometimes an employee will work 20 minutes or 45 minutes or one hour and twenty-five minutes of overtime. With these numbers, you won’t be able to do the calculation in your head.

Get into the habit of following the steps here and you’ll have no problem, regardless of the numbers.

Step #2: Calculate the overtime pay rate.

Overtime Pay Rate = Regular Pay Rate x 1.5 (Overtime Multiplier)
Overtime Pay Rate = $12 per hour (Regular Pay Rate) x 1.5 (Overtime Multiplier)
Overtime Pay Rate = $18 per hour

Step #3: Calculate pay for regular hours worked.

Regular Pay = Regular Work Week x Regular Pay Rate
Regular Pay = 40 hours (Regular Work Week) x $12 per hour (Regular Pay Rate)
Regular Pay = $480

Step #4: Calculate pay for overtime hours worked.

Overtime Pay = Overtime Hours Worked x Overtime Pay Rate
Overtime Pay = 18 hours (Overtime Hours Worked) x $18 per hour (Overtime Pay Rate)
Overtime Pay = $324

Step #5: Add the regular pay and the overtime pay together to get Robin’s gross pay for the week.

Gross Pay = Regular Pay + Overtime Pay
Gross Pay = $480 (Regular Pay) + $324 (Overtime Pay)
Gross Pay = $804

If you look back at the previous section (Total Hours), you’ll see that both methods yield the same gross pay.

Some businesses prefer the Total Hours method, while other businesses prefer the Separate Hours method. Both can be useful for revealing certain aspects of your business and the trends therein. It all depends on the data points your business needs to control labor costs.

Be sure to review all federal, state, and local requirements — or consult with a professional — before calculating your business’s overtime.

How To Control Overtime Costs

Once you understand how to calculate overtime, the next thing you can focus on is controlling the costs associated with such extra work so that it will be less likely to affect your bottom line.

Experiment with these suggestions to see what works for your team and your business.

1) Monitor Labor Costs In Real Time

A powerful way to reduce the impact that overtime has on your budget is to monitor labor costs in real time. In most cases, that means keeping an eye on your labor budget as you schedule.

The right employee management software can often give you a real-time view of how much each shift will cost your business.

Armed with that information, you can revise the schedule — who works when and for how long — so that each shift is covered and no one employee strays into overtime territory.

Such a real-time readout is a powerful tool for controlling one of the largest costs your business may have to face — the expenses associated with your labor budget.

2) Enforce Clock-In/Clock-Out Regulations

After you’ve learned how to calculate overtime and what goes into making the process work, you may discover that another powerful way to control labor costs is to go back to the source of all the numbers: the time clock.

Setting and then enforcing clock-in/clock-out regulations communicates to your employees that you are serious about controlling costs and maintaining an organized and efficient payroll system.

That can help them be serious about it as well. At the very least, they’ll know that it’s something that you’ll be keeping an eye on going forward.

Once you’ve set your business’s time clock regulations, publish them in the employee handbook so that everyone has access to the information and can refer to it if they have questions.

For example, one rule might state that an employee’s shift (and when you start paying them) begins at the scheduled time (e.g., 9 a.m.) instead of when they clock in.

A team member may like to arrive at 8:45 a.m. so that they have enough time to stow their lunch, go to the bathroom, and gather their supplies before getting to work at 9 a.m.

But, if you allow them to clock in fifteen minutes early — and you pay them for that time — they’ll amass an extra hour and fifteen minutes over the course of a five-day workweek.

That may not seem like a lot, but if they do it consistently for a year, the overtime costs can really add up.

In fact, if an employee’s regular pay rate is $15/hour, you might end up paying $1,000 or more in overtime if you allow just 15 minutes extra every day.

And that’s just for one employee. Multiply that extra $1,000 by the number of employees in your business, and you can see how the overtime costs can add up quickly if you don’t enforce your clock-in/clock-out rules.

3) Give Your Team Plenty Of Lead Time

Giving your team plenty of lead time between when you release the schedule and when it goes active can actually help reduce the costs associated with overtime.

How so?

When you plan and then distribute the work schedule at least a month in advance, you make it easier for your team to resolve issues if there’s a conflict between their work and personal schedules.

That can help prevent absenteeism from getting out of hand and can help reduce the risk that one employee will need to work overtime to cover an absent employee’s shift.

One of the best ways to get the schedule into your team’s hands with plenty of time to spare is to post it in the cloud. An advanced schedule maker, like Inch, makes it easier to do this.

Here’s one way you can harness the power of the cloud for this purpose:

• Build your schedule a month in advance
• Post it online
• Give your team permission to make changes (i.e., find a substitute) if they find a conflict
• Close the schedule
• Make your own changes
• Repost the finalized version for all to see

With a process like this, employees no longer have to physically be at their place of work to view the schedule. As long as they have an internet connection, they can access work information at any time of the day or night and from any location.

Such accessibility can help cut down on instances when employees don’t show up for work and can help prevent the need to bring in a substitute who might have to work overtime.

4) Train Your Employees On Other Jobs

Training your employees to work in positions that are different from their regular job can help you get control of overtime costs throughout your business.

For example, if you have several part-time employees (lawnmowers, for example) who were also trained to work other jobs (e.g., pressure wash buildings and driveways), they could all fill in for each other should the need arise.

If one of your regular pressure washers calls in sick at the last minute, you can ask one of the part-time lawnmowers to come in instead of asking a full-time team member to stay late and work extra.

Chances are, those part-time team members are nowhere near accumulating enough hours to push them beyond the 40-hours-per-week mark.

So, asking them to work a few extra hours won’t have as large an impact on your labor budget as asking a full-time employee to work to cover the shift.

Training your team members in this way gives them extra skills, expands the options of who can work in what position, and gives you the flexibility you need to control overtime costs throughout your business.

Inch Makes Overtime Easy

The Inch software won’t crunch the numbers for you — you have to learn how to calculate overtime for yourself.

But Inch will make controlling overtime easier than ever before thanks to advanced features, such as:

• Staff scheduling that allows you to see what shifts will cost as you build the schedule
• Time tracking that turns any device into a time clock
• Task management that helps improve productivity
• Labor cost management that protects your bottom line
• Team communication that keeps everyone informed

Our software even allows you to export timesheets for streamlined wage payment every time (whether you DIY or outsource it to a payroll processing company).

Learning how to calculate overtime doesn’t have to be difficult. With a few simple formulas and the help of our workforce management software, you’ll be cutting checks like the pros in no time.

For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit TryInch.com today.