With many payroll rules and regulations out there, all business owners want to get it right—just like you. And it's not all about keeping the federal government's Department of Labor happy; you want happy employees and a thriving business. Payroll plays a big part in that.
All business owners run into the need to calculate overtime, so it's essential you know what overtime means and how to calculate it.
When your payroll is correct, you don't have the weight of an audit from the government hanging around, which could be costly for your business.
Let's avoid those pesky audit triggers, shall we?
By the end of this article, you'll know how overtime works and how to calculate the overtime rate for your employees.
We'll break down the details of the whole overtime thing—that way, you're not spending more time on it than you have to.
Calculation: Employee's hourly pay rate x 1.5x overtime hours worked
Let's say you own a clothing store and your employee worked 48 hours during the busiest shopping week of the year. This employee is considered non-exempt, so they’re entitled to overtime pay. Their regular hourly rate of pay is $15.
Here’s the calculation for your employee's overtime pay in four simple steps—this 1.5x rate is also called Time and a Half Pay:
Step 1: $15 per hour (regular pay) x 40 hours (hours worked at regular pay) = $600
Step 2: $15 per hour (regular pay) x 1.5 (overtime rate) = $22.50
Step 3: $22.50 (overtime hourly rate) x 8 (hours worked at overtime pay) = $180
Step 4: $600 (regular pay for 40 hours worked) + $180 (overtime pay for 8 overtime hours worked) = $780
Your employee's total pay (including overtime) is $780 for the pay period.
There are two ways to calculate overtime pay for exempt employees.
You'll use the same overtime guidelines listed above for non-exempt employees after using one of the two methods below first.
THE FIRST METHOD
Calculate your employee's hourly rate when they’re paid an annual salary. This rate is based on 2,080 hours of work a year—a salaried employee's assumed annual working hours. If you pay your employee $45,000 annually, this is your overtime rate calculation:
THE SECOND METHOD
Calculate your employee's hourly rate when they’re paid a weekly salary. Divide the salary by a week's typical working hours. If you pay your employee $850 that week, and they worked 40 hours, then your calculation looks like this:
It's essential to make payroll recordkeeping easy so you're not spending time chasing and verifying employee hours. We can help with that. The goal is to save time, not take more of it away.
Want more info? The U.S. Department of Labor has guidelines, fact sheets, e-tools, posters, and more related to overtime. It's worth checking out.
Now you know how to calculate overtime for exempt and non-exempt employees. That's called winning in our book!
And, you can have the peace of mind that your company is fully protected in case of one of those pesky audits. Because, hey, you just never know.
The goal is to know how your business works while keeping a paper trail to verify all information, such as employee overtime payments. Then you can feel confident because you know everything is right and in the right place.
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