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

Outside of an office building at night

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

An outside city clock

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.

How To Calculate An Overtime Rate

Man learning how to calculate overtime with a calculator

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

Calculator with cash and coins next to it

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

Bakers learning how to calculate overtime

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

Woman learning how to calculate overtime for herself

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.

Inch Makes Overtime Easy

Sling app for helping to learn how to calculate overtime

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:

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.

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