How to calculate overtime pay: formula and examples

Published Tuesday 6 October 2026

Table of contents

• What is overtime pay?
• Overtime laws in the US
• How to calculate overtime pay
• Download a free overtime worksheet
• Calculate and track overtime with Xero
• FAQs on overtime pay

Key takeaways

• You owe non-exempt employees 1.5 times their regular rate for every hour over 40 in a fixed seven-day workweek, hourly, salaried, or part-time.
• Non-discretionary bonuses raise the regular rate used for overtime, while discretionary gifts like holiday bonuses stay out of the calculation.
• From tax year 2026, you report each employee's qualified overtime premium on Form W-2 in box 12 with code TT.
• Accurate time records keep you compliant, because you owe overtime for all hours over 40 even when nobody approved the extra time.

What is overtime pay?

Overtime pay is 1.5 times an employee's regular rate for each hour they work over 40 in a workweek. Knowing how to calculate overtime correctly starts with the Fair Labor Standards Act (FLSA), which requires this time-and-a-half rate for all non-exempt employees.

Mistakes here are common. In 2008 testimony, the US Government Accountability Office (GAO) reported that nearly 85% of FLSA violations were related to overtime.

That's why overtime sits at the heart of staying compliant with payroll rules. The next section covers the federal and state laws that decide who earns it.

Overtime laws in the US

The FLSA sets the federal baseline: non-exempt employees earn 1.5 times their regular rate for hours over 40 in a workweek. Some states add stricter rules on top.

You can choose any fixed seven-day period as your workweek, but it has to stay the same once you set it. For example, your workweek could run Sunday at midnight through Saturday at 11:59 pm. Another option is Monday at 8 am through the following Monday at 7:59 am.

Who qualifies for overtime pay?

Overtime eligibility depends on how you pay and classify each employee. Under federal law, these groups generally look like this:

• Almost all hourly employees are entitled to overtime
• Non-exempt salaried employees earn overtime after 40 hours a week
• Blue-collar salaried workers are usually entitled to overtime
• Most white-collar salaried workers are exempt

Exemptions from overtime pay

The FLSA exempts salaried employees who earn at least $684 per week and work in an executive, administrative, professional, or creative role. Both conditions must apply.

Two more groups have their own exemption rules:

• Outside sales employees, who have no minimum salary requirement
• Skilled computer employees, who must earn at least $27.63 per hour or $684 per week

For full details, read the US Department of Labor's fact sheet on exempt employees.

State overtime rules

Some states go further than federal law. California, for example, sets three extra rules:

• Daily overtime at 1.5 times the regular rate for hours over eight in a single day
• Double time at 2 times the regular rate for hours over 12 in a single day
• Double time for hours over eight on the seventh consecutive workday

Check with your state's department of labor for the rules where you operate. Bloomberg Law also keeps a summary of overtime rules by state.

The qualified overtime tax deduction

Employees can now deduct part of their overtime pay from their federal taxable income. On August 6, 2026, the Internal Revenue Service (IRS) updated its FAQs on the qualified overtime deduction (IR-2026-88). The update is Fact Sheet FS-2026-13, which replaces the January 2026 version, FS-2026-01.

The deduction covers only the premium above the regular rate, which is the "half" in time-and-a-half. It's capped at $12,500, or $25,000 for joint filers, for tax years 2025–2028.

You still withhold federal income tax from overtime pay as usual. Employees who expect to claim the deduction can account for it in step 4(b) of Form W-4.

How to report qualified overtime on 2026 W-2s

From tax year 2026, you report each employee's total qualified overtime compensation on their year-end wage statement. It goes in box 12 with code TT. This applies to the W-2s you furnish in January 2027.

Report the full premium amount, even if it's above what the employee can deduct. If you spot a mistake after filing, correct it with Form W-2c, as the IRS explains in Fact Sheet FS-2026-13.

The easiest approach is to track the overtime premium for each employee every pay period. That way, the box 12 figure is ready when year-end arrives.

How to calculate overtime pay

Here's how to calculate overtime: multiply the regular rate by 1.5, then by the hours worked over 40 in the workweek. Follow these steps for any employee:

1. Confirm the employee is non-exempt under federal and state rules, since exempt employees don't earn overtime.
2. Add up the hours the employee worked in your fixed seven-day workweek, using a timesheet to keep the record accurate.
3. Subtract 40 from the total to find the number of overtime hours.
4. Work out the regular rate: the hourly rate, annual salary ÷ 52 ÷ 40, or an adjusted rate that includes non-discretionary bonuses.
5. Multiply the regular rate by 1.5 and then by the overtime hours to get overtime pay.
6. Add straight-time pay for the first 40 hours to overtime pay to get total weekly pay.

How to calculate overtime pay for hourly employees

Hourly employees are the simplest case, because their hourly rate is their regular rate. Say an employee earns $20 an hour and works 45 hours in a week:

1. Subtract 40 from 45 to get 5 overtime hours.
2. Multiply $20 by 1.5 to get an overtime rate of $30.
3. Multiply 5 hours by $30 to get $150 in overtime pay.
4. Add $800 in straight-time pay for 40 hours to reach $950 in total pay.

How to calculate overtime pay for salaried employees

For salaried non-exempt employees, convert the salary to an hourly rate based on a standard 40-hour workweek. Say an employee earns $52,000 a year and works 50 hours in a week:

1. Divide $52,000 by 52 weeks, then by 40 hours, to get a regular rate of $25.
2. Subtract 40 from 50 to get 10 overtime hours.
3. Multiply $25 by 1.5 to get $37.50, then multiply by 10 hours for $375 in overtime pay.
4. Add the $1,000 weekly salary to reach $1,375 in total pay.

Overtime pay for bonus and commission-based employees

Bonuses change the regular rate, but only some types count. The difference comes down to whether the employee expects the bonus:

• Non-discretionary bonuses are formula-based rewards tied to targets like quality, accuracy, or efficiency, and you include them
• Discretionary bonuses are unexpected awards like holiday bonuses or employee-of-the-month recognition, and you leave them out

Say an employee earns $20 an hour, works 50 hours, and receives a $100 non-discretionary bonus. Here's the calculation:

1. Multiply $20 by 50 hours to get $1,000, then add the $100 bonus for $1,100 in total straight-time earnings.
2. Divide $1,100 by 50 hours to get a regular rate of $22.
3. Multiply $22 by 0.5 to get $11, then multiply by 10 overtime hours for a $110 premium.
4. Add $1,000, $100, and $110 to reach $1,210 in total pay.

You use 0.5 instead of 1.5 here because the $1,000 already pays every hour at straight time. The only amount left to add is the extra half-time premium on the 10 overtime hours.

Download a free overtime worksheet

A worksheet lets you run these steps the same way every pay period and keep a record of each result. It also tracks the premium figure you'll need for 2026 W-2 reporting.

The worksheet has columns for:

• the workweek and total hours worked
• the regular rate of pay
• overtime hours
• the overtime premium, which is the qualified overtime amount for W-2 box 12 code TT
• total weekly pay

To get started, download the overtime worksheet and fill in one row per employee each week.

Calculate and track overtime with Xero

Getting overtime right protects your team's trust and your business. When you track hours carefully and apply the formula every week, you'll pay people correctly and have your W-2 figures ready at year-end.

Xero payroll with Gusto keeps payroll and your books in one place, so there's less manual admin each pay run. Try it out and get one month free.

FAQs on overtime pay

Here are answers to common questions about overtime.

Do part-time employees qualify for overtime?

Yes, part-time employees earn overtime if they work more than 40 hours in a workweek. The FLSA applies the same rule regardless of full-time or part-time status.

Can employers require employees to work overtime?

Yes, you can generally require overtime as long as you pay the correct rate. Some employment contracts or union agreements may limit mandatory overtime.

What happens if an employer doesn't pay overtime?

You may owe back wages plus an equal amount in liquidated damages. Repeated or willful violations also carry a civil money penalty of up to $2,515 each under federal regulation 29 CFR 578.3, with no 2026 inflation adjustment.

Does overtime apply to remote workers?

Yes, remote employees earn overtime on the same terms as in-office staff. Time tracking software helps you capture every hour they work, wherever they are.