Calculating Overtime Pay Correctly

Running a business means wearing a dozen hats—sometimes all at once. Between managing employees, keeping customers happy, and tracking finances, payroll can feel like one more headache you’d rather not deal with. But when it comes to overtime pay, getting it wrong isn’t just a minor slip-up—it can lead to costly fines, employee disputes, and legal trouble.

So, how do you accurately calculate overtime pay and stay compliant with labor laws? That’s exactly what we’ll cover in this guide. Whether you’re new to payroll or just looking to refine your process, you’ll find everything you need here.

What Is Overtime Pay?

At its core, overtime pay is extra compensation for employees who work beyond a standard workweek. In most cases, the federal Fair Labor Standards Act (FLSA) defines this as time-and-a-half pay for any hours worked beyond 40 hours in a workweek.

But overtime isn’t just about extra pay, it’s a legal requirement designed to protect employees from being overworked without fair compensation.

Who Is Eligible for Overtime Pay?

Not every worker qualifies for overtime pay. The FLSA divides employees into two categories:

• Non-Exempt Employees – These workers must be paid overtime when they exceed 40 hours in a workweek. Most hourly employees fall into this category.
• Exempt Employees – These workers do not qualify for overtime. Typically, this includes salaried employees who meet specific job duties and earn above a certain threshold.

How Do You Know If an Employee Is Exempt?

The FLSA uses a salary and duties test to determine whether someone is exempt from overtime. To qualify for exemption, an employee must:

• Earn at least $684 per week ($35,568 per year).
• Perform job duties that are considered executive, administrative, or professional.

If an employee doesn’t meet both requirements, they’re non-exempt, meaning they qualify for overtime pay.

But here’s where things get tricky—state laws may have different rules. For example, California has its own salary threshold, which is higher than the federal standard. That’s why it’s crucial to check your state’s overtime laws to ensure compliance.

Fair Labor Standards Act (FLSA) Rules on Overtime

The FLSA is the foundation of overtime laws in the U.S., and every business needs to understand its requirements.

• Overtime is required after 40 hours in a workweek (not based on daily hours).
• The minimum overtime rate is 1.5 times the regular hourly rate.
• Employers must keep accurate records of hours worked.
• Certain jobs may have special overtime rules, such as healthcare workers and first responders.

Failing to comply with FLSA overtime regulations can lead to expensive lawsuits, back pay penalties, and even Department of Labor investigations. So, if you’re managing payroll manually, it’s worth double-checking your calculations, or better yet, using payroll software to automate compliance.

How to Calculate Overtime Pay Step by Step

Now, let’s break down exactly how to calculate overtime pay correctly.

Step 1: Determine the Regular Rate of Pay

Before you can calculate overtime, you need to know an employee’s regular rate of pay. For hourly workers, this is straightforward, it’s simply their hourly wage. For salaried employees, you’ll need to divide their weekly salary by the number of hours they work per week to determine their hourly rate.

Example:

An employee earns $800 per week and works 40 hours per week.

Their regular rate of pay is $20 per hour.

Step 2: Multiply by the Overtime Rate

The FLSA overtime rate is 1.5 times the regular hourly wage.

Example:

The employee earns $20 per hour. Therefore their overtime rate = $20 × 1.5 = $30 per hour.

Step 3: Multiply by the Number of Overtime Hours Worked

If the employee works 45 hours in a week, they’ve worked 40 hours at their normal rate and an additional 5 overtime hours.

Example:

The employees' total weekly pay (including overtime) would be:

(40 hours × $20) + (5 hours × $30) = $800 + $150 = $950.

State-Specific Overtime Laws

While the FLSA sets the national standard for overtime pay, some states have stricter rules that business owners must follow. Ignoring these differences can lead to payroll mistakes and even legal trouble.

Some states require overtime pay in scenarios beyond the federal 40-hour rule. A few notable examples include:

• California – Overtime applies after 8 hours in a single day and double-time kicks in after 12 hours.
• Alaska – Daily overtime applies after 8 hours of work per day, similar to California.
• Colorado – Requires overtime for more than 12 consecutive hours in a shift, even if the total workweek is under 40 hours.

If your business operates in multiple states, it’s not enough to follow just federal overtime laws. You must also comply with state-specific regulations, which can be more employee-friendly. Failing to account for daily overtime laws in certain states could mean unexpected back pay claims, penalties, and lawsuits—something no business wants to deal with.

How Horizon Payroll Can Help with Overtime Compliance

Managing overtime payroll doesn’t have to be a hassle. With Horizon Payroll, businesses can:

• Ensure FLSA and state law compliance without the guesswork.
• Automate payroll processing, reducing errors and saving time.
• Get expert support for complex payroll situations, like multi-state overtime rules.

Why Work with Horizon Payroll?

Unlike generic payroll providers, Horizon Payroll specializes in small and mid-sized businesses, offering:

• Custom payroll solutions tailored to your industry.
• Real-time compliance updates to keep you ahead of labor law changes.
• Dedicated customer support, so you’re never left figuring things out alone.

Horizon Payroll’s timekeeping solutions integrate with payroll processing to ensure flawless overtime calculations.

• Automated Time Tracking – Employees clock in and out digitally, eliminating timecard errors.
• Customizable Overtime Alerts – Set up real-time alerts when employees are approaching overtime hours.
• Integration with Payroll – All hours are seamlessly transferred to payroll processing, reducing manual entry and preventing mistakes.
• Mobile & Web Access – Employees can log their hours remotely, ensuring accurate records for on-site, remote, and hybrid teams.

This content does not constitute legal advice and does not address federal, state or local law.