If you’re confused about how to calculate overtime, don’t worry, you’re not alone. Keeping track of (and manipulating) all the numbers necessary to deal with regular payroll is hard enough. But add in a few overtime hours and you’ve got a serious conundrum.

But again, don’t feel bad or inadequate. Payroll is one of the most complicated processes a business can face (right up there with __inventory__, __scheduling__, and hiring). That’s why a great many businesses pay a professional to do it for them.

That’s not to say that you can’t process your own payroll and calculate your own overtime. You certainly can. And for smaller businesses with fewer employees, that might make good business sense. It all depends on your situation.

To help you decide if the DIY-route is right for you, the management experts at __Sling__ have created this complete guide on how to calculate overtime related to payroll.

## Setting Up Your Payroll Process

Calculating overtime starts with setting up your payroll process first. Think of payroll in terms of four basic categories:

- Calculating employee compensation
- Keeping track of money withheld from paychecks
- Calculating employee and employer taxes
- Paying those taxes to the appropriate federal, state, and local agencies

Before you crunch any numbers, though, you’ll need to:

- Apply for a federal Employer Identification Number (EIN)
- Research federal, state, and local laws
- Establish pay periods
- Have all employees fill out a W-4 and I-9

And that’s just the tip of the iceberg. Within each of those categories mentioned above, there exist multiple steps that you’ll need to satisfy and paperwork that you’ll need to complete.

If it all seems overwhelming or you need information on any of these essential processes, check out this article on how to do payroll accounting yourself and this article on the best way to calculate work hours.

## What Is Overtime?

With the establishment of the Fair Labor Standards Act (FLSA) in 1940, the federal government set a limit on how many hours per week (40) employers could ask their employees to work at regular pay (see *Part-Time Vs. Full-Time Work Schedules | What’s The Difference?* for more details).

Above those 40 hours, employers were now required to provide their employees with extra compensation in the form of overtime pay.

The standard overtime rate is 1.5 times the employee’s regular hourly wage. This number is also commonly known as “time-and-a-half.”

So if one employee makes $15 per hour, their overtime rate is $22.50 per hour ($15 x 1.5). If another employee makes $25 per hour, their overtime rate is $37.50 per hour ($25 x 1.5).

For the employee who makes $15 per hour and works 40 hours per week, their gross pay is $600 ($15 x 40). If they work any number of minutes or hours above 40 hours, you must compensate them for that work at your overtime rate.

We’ll discuss these calculations in more detail in the sections below.

It’s also worth noting that as long as you comply with the federal, state, and local laws on how to calculate overtime (which dictate a minimum level of 1.5 times regular pay), you can technically compensate your eligible employees however you like.

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 normal hourly rate).

There are no laws that state an employer has to compensate employees at double their regular rate. It’s simply an incentive that some businesses offer to get employees to work during days they would normally have off.

Now that you understand what overtime is and where it came from, let’s turn our attention to the how-to of the issue.

## Points To Consider When Calculating Overtime

Before you start crunching overtime numbers, you need to establish a few key facts:

- Is the employee eligible for overtime?
- What is the employee’s hourly rate of pay?
- How much do you pay for overtime?
- Are there any federal, state, or local laws that govern overtime for your business?

Most businesses don’t pay their salaried employees overtime, and some employees don’t qualify for overtime even if you pay them on an hourly basis. A large portion of it depends on how you set up your payroll system.

Whether or not an employee qualifies for overtime also depends on regulations handed down by the Department of Labor.

Effective January 1, 2020, an employee paid $684 or more per week (raised from $455 per week) is not eligible to accumulate overtime hours. In addition, a “highly compensated employee” (HCE) who makes $107,432 or more per year (raised from $100,000) is not eligible for overtime either.

If you have questions about how to calculate overtime and the laws that govern the process, consult a qualified accountant and a lawyer with knowledge of your industry.

In regard to point three, the standard overtime rate is 1.5 times the employee’s regular hourly rate (also called “time-and-a-half”). That’s why it’s vital to know what you pay each employee before calculating overtime.

Once you’ve established the key information, you can begin computing the overtime pay.

## How To Calculate Overtime: 4 Examples

In the following examples, we’ll show you how to calculate overtime for a hypothetical employee named Kate. Here is the information we will use:

- Kate is eligible for overtime.
- Kate is paid $20 per hour.
- Normal work period is 40 hours per week.
- During a big
__p____roject__, Kate worked 50 hours in one week. - Your business’s overtime rate is the standard 1.5 x the hourly rate.
- There are no other federal, state, or local laws on overtime.

With that in mind, let’s investigate our first method.

### 1) Separate Regular Hours & Overtime Hours

First, separate the total time worked into __regular hours__ and overtime hours.

*50 hours (total time) – 40 hours (regular work week) = 10 hours (overtime)*

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 1 hour and 15 minutes or 4 hours and 30 minutes of overtime, so you won’t be able to do the calculation in your head. Get into the habit of following the steps and you’ll have no problem regardless of the numbers.

Next, calculate the dollar amount you pay for overtime.

*$20 per hour (regular pay) x 1.5 (overtime rate) = $30 per hour (overtime pay)*

With that number in mind, calculate the regular and overtime pay separately.

*40 hours x $20 per hour = $800 (regular pay)*

*10 hours x $30 per hour = $300 (overtime pay)*

Then add the two together to get Kate’s total pay for that week.

*$800 (regular pay) + $300 (overtime pay) = $1100 (total pay for the week)*

Now that you’ve got that __calculation__ under your belt, the next example will just have formulas.

### 2) All Hours Together

*50 hours (total worked) x $20 per hour (base pay) = $1000*

*$20 per hour (base pay) x 0.5 (overtime rate) = $10**

**Based on this method, all overtime hours will be paid at $10 per hour.*

*10 hours (overtime) x $10 = $100*

*$1000 + $100 = $1100 (total pay for the week)*

You can see that you arrive at the same number regardless of the method you use. Choose the one that makes the most sense to you.

Now let’s investigate what happens when Kate’s hourly rate changes.

### 3) Shift Differential

In this example, Kate works 50 hours during both the morning shift and the __night shift__. The night shift includes a $1 per hour premium to her base pay. The difference in her pay rates based on the shift she works is called shift differential. The method we’ll use is similar to the “All Hours Together” procedure outlined above.

*50 hours (total) x $21 (regular pay + shift differential) = $1050*

*$21 per hour x 0.5 (overtime rate) = 10.5*

*10 hours (overtime) x 10.5 = $105*

*$1050 + $105 = $1155 (total pay for the week)*

### 4) Different Jobs At Different Pay Rates

Sometimes, your employees need to work different jobs at different pay rates (this is especially common in __restaurants__). For example, Kate works 40 hours as a server at $20 per hour. But then she fills in when your bartender gets sick and works 10 hours at $15 per hour. This may seem complicated, but it’s really the same math as above.

*40 hours x $20 per hour = $800 (regular pay)*

*$15 per hour x 0.5 (overtime rate) = $22.50 per hour*

*10 hours x $22.50 = $225 (overtime pay)*

*$800 (regular pay) + $225 (overtime pay) = $1025 (total pay for the week)*

As you can see from these examples, once you have the basic formulas down, the more complicated scenarios are fairly simple to figure out.

## Get Control Of Your Overtime With Scheduling

One of the best ways to get control of your overtime is by using a __scheduling__ tool like __Sling__. The Sling app is designed specifically for streamlining your scheduling process, so all of its tools are dedicated to that task.

Sling’s user-friendly interface makes it easy to see how many hours each employee will work each week and gives you notifications of overlapping shifts and double-bookings.

Sling makes quick work of even the most complicated overtime schedule thanks to its flexibility and built-in artificial intelligence. What once took hours now takes mere minutes thanks to:

- Templates that make recurring jobs and shifts as close as the click of a button
- Notifications that reveal overlapping shifts and double-bookings
- Reminders that keep time-off, availability, and shift-trade requests visible while you schedule
- Budget and overtime restrictions that prevent you from exceeding the numbers your business needs to thrive
- Open shifts that let your employees pick when they want to work on a first-come, first-served basis
- Automatic messages sent right to your employees’ mobile devices informing them when their shift starts, if a new shift is available, or if someone would like to trade shifts

Then, once the schedule is set, you can harness the power of Sling’s other features — onboard time clock with geofencing, labor cost tracking and analysis, group communications, newsfeed, and task list — to simplify and streamline the time it takes to organize and manage your workforce and keep overtime-related expenses under control.

Sling even provides features that help you distribute your schedule efficiently, keep it up to date, and find substitutes in an emergency. It truly is the turn-key solution to all your scheduling, overtime, and labor-cost control needs.

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