Overtime Pay

Overtime pay is additional compensation paid to employees for hours worked beyond a standard limit. In the United States, the Fair Labor Standards Act (FLSA) of 1938 requires employers to pay covered, nonexempt employees at least one and a half times their regular rate of pay for every hour worked over 40 in a workweek. Many states add their own rules, and some go further: California, for example, requires overtime for hours over eight in a single workday and double time in some situations.

For accountants and payroll teams, overtime affects gross wages, payroll tax calculations, labor cost budgets and accruals. Misclassifying employees or miscalculating the regular rate are among the most common causes of wage claims and back-pay settlements.

The FLSA covers most private employers and public agencies. Employees are either nonexempt, and entitled to overtime, or exempt. An exempt employee generally must meet three tests: be paid a fixed salary, earn at least a minimum salary level, and perform mainly executive, administrative or professional duties. The federal salary threshold is $684 a week ($35,568 a year), after a 2024 rule that would have raised it was struck down by a federal court in November 2024. Some states set higher thresholds. Job titles do not decide status; actual duties and pay do. Hourly workers are almost always nonexempt.

The basic calculation for a week is:

• $R$ is the regular hourly rate.
• $H$ is the number of regular hours paid, up to 40.
• $H_{t}$ is the total hours worked in the workweek, where it exceeds 40.

A warehouse worker paid $24 an hour works 46 hours in a week. Regular pay is 40 times $24, or $960. Overtime is 6 hours at $36 (1.5 times $24), or $216. Gross pay for the week is $1,176. The regular rate must include most other pay for the week, such as shift differentials and nondiscretionary bonuses. If the worker also earned a $92 production bonus, the regular rate becomes ($1,104 of straight-time pay plus $92) divided by 46 hours, or $26, and the overtime premium is half of $26 times 6 hours, or $78 on top of straight-time pay for all hours, giving total pay of $1,104 plus $92 plus $78, which is $1,274.

Overtime is part of gross wages and is recorded in salaries and wages expense, or in direct labor or factory overhead for manufacturers. Many cost accounting systems charge the straight-time portion of overtime hours to the job being worked and treat the premium as overhead, unless a specific customer order caused the overtime. Overtime is subject to income tax withholding and to Social Security and Medicare taxes, and it increases employer payroll taxes. At period end, overtime worked but not yet paid must be included in accrued payroll.

For tax years 2025 through 2028, legislation enacted in July 2025 allows eligible individuals to deduct qualified overtime compensation, broadly the premium portion above the regular rate, up to $12,500 a year ($25,000 for joint filers), with the deduction phasing out at higher incomes. Employers must report qualifying overtime separately to employees. The deduction affects income tax only; payroll taxes still apply in full. Guidance is published by the Internal Revenue Service.

• Averaging hours over two weeks: overtime is calculated per workweek, so 30 hours one week and 50 the next still creates 10 hours of overtime.
• Unpaid "off-the-clock" work, such as answering messages after hours, which still counts as hours worked.
• Paying salaried nonexempt staff a flat salary without overtime.
• Leaving bonuses out of the regular rate, which understates the overtime premium.
• Substituting time off later for overtime pay, which private employers generally may not do under federal law.

Persistent overtime can also signal understaffing; at time and a half, it can be cheaper to hire, once wages, benefits and the minimum wage rules for new hires are compared.