How to Calculate Overtime for Monthly Salary Employees: Guide

Overtime is an important part of compensation, but mistakes in calculating it can cause problems. In 2007, Walmart faced legal issues over overtime pay errors, leading to a settlement with the U.S. Department of Labor (DOL). More recently, Oakland spent nearly $1.7 million on unauthorized overtime due to a payroll system problem.

These issues are common in many organizations due to poor tracking or misunderstandings about pay rules. Under Federal law, when an employer requires an employee to work overtime, they must compensate them for those extra hours.

This comprehensive guide explains how to calculate overtime for monthly salary employees, including tax implications and examples to clarify the process.

What is overtime pay?

Overtime pay is the extra money an employee gets for working more than the usual number of hours in a workweek. To qualify for overtime compensation, the employee must be non-exempt under the Fair Labor Standards Act (FLSA).

As mentioned earlier, the FLSA requires employers to pay employees extra for overtime. Employees covered by the FLSA are entitled to at least 1.5 times their "regular rate of pay" for any hours worked over 40 in a week.

Moreover, the goal of overtime pay is to fairly reward employees for working extra hours beyond their regular schedule.

To calculate, the overtime calculation formula is: Overtime pay = nonexempt employee’s regular rate of pay x 1.5 x number of overtime hours worked.

For example, if a non-exempt employee earns $15 per hour and works 10 overtime hours, the overtime pay would be: Overtime pay = $15 x 1.5 x 10 = $225

Proper classification of employees as exempt or non-exempt is key to managing overtime pay. Organizations can use salary benchmarking to ensure competitive pay and confirm employees meet the salary requirements for exempt or non-exempt status.

What does premium rate factors 1.5 * 1.0 mean?

In the context of overtime, a premium rate of 1.5 * 1.0 means that for any hours worked beyond regular hours, the employee will be paid 1.5 times their regular hourly rate. The multiplication by 1.0 shows that no additional multipliers are applied, so the overtime pay remains "time and one half."

Overtime pay tax implications and rules

Overtime pay is taxed the same way as regular wages. It is subject to federal and state income taxes, as well as Social Security and Medicare taxes. While there have been proposals to "cut taxes on overtime pay," these changes are not yet law as of this writing.

The new overtime rules 2025 include an increase in the federal minimum wage required for employees to be classified as exempt from overtime. Beginning January 1, 2025, the "standard salary level" will rise from the current $684 per week to $1,128 per week, which is equivalent to $58,656 per year for a full-year worker.

Also, the total annual compensation requirement for "highly compensated employees" will increase from the current $107,432 per year to $151,168 per year.

Note that the minimum salary exemption requirements for 2025 vary by state. To ensure compliance and stay up to date, organizations can access the latest wage data from Compensation Software for all states, cities, counties, and municipalities.

Who is exempt from overtime pay?

Employees who are exempt from overtime payment under the Fair Labor Standards Act (FLSA) typically include:

• Executive: Manage a department, supervise at least two individuals, and have hiring or firing authority.

• Administrative: Perform office work related to business operations and make decisions based on judgment.

• Professional: Use advanced knowledge in fields like science or law, typically gained through specialized education.

• Computer: Work in tech roles, such as systems analysis or software development, and meet specific salary or hourly criteria.

• Outside sales: Primarily make sales or secure contracts and work away from the employer’s business location.

• Highly compensated: Earn at least $107,432 a year, including at least $684 weekly, and are exempt from overtime.

To qualify for exemption, employees must meet specific criteria, including being paid a salary of at least $684 per week, performing job duties that involve management, decision-making, advanced knowledge, or specialized skills, and in some cases, earning a total annual compensation of at least $107,432.

However, it's important to note that certain workers, such as blue-collar employees, police officers, firefighters, and similar roles, are not exempt from overtime pay under the Federal law, even if they earn above the standard salary threshold.

How to calculate overtime for monthly salary employees

So, how is overtime calculated for monthly salaried employees? The following explains how it's done.

1. Step 1: Check if the employee is eligible for overtime

   Before calculating overtime, make sure the employee is eligible for it. Usually, only nonexempt employees qualify for overtime pay, based on labor laws. Exempt employees, like certain executives or professionals, are not eligible for overtime.

2. Step 2: Find the regular monthly salary

   Next, find the employee's regular monthly salary. This is the amount they earn before overtime, bonuses, or deductions, and it serves as the basis for calculating overtime wages.

   Speaking of bonuses, most are based on performance. If your organization focuses on performance, Compensation Software's Merit Modeling feature helps you easily model the cost of merit increases and build merit matrices based on performance, range placement, or market index.

3. Step 3: Find the number of working hours in a month

   To calculate overtime, check the number of hours worked in a month. This is usually based on a standard 40-hour workweek multiplied by the number of weeks in the month (typically 4 or 4.33). For example: 40 hours per week x 4 weeks = 160 hours worked per month.

4. Step 4: Calculate the hourly rate

   Next, calculate the employee's hourly rate by dividing the monthly salary by the number of hours worked in a month. For example, if the monthly salary is $3,000 and the employee works 160 hours, the hourly rate is: $3,000 ÷ 160 = $18.75 per hour.

5. Step 5: Find the overtime rate

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   Under Federal law, overtime is paid at 1.5 times the regular hourly rate. Multiply the hourly rate from Step 4 by 1.5 to get the overtime pay rate. For example, if the regular hourly rate is $18.75, the overtime rate is: $18.75 x 1.5 = $28.125 per hour.

6. Step 6: Calculate overtime pay

   Lastly, calculate the overtime pay by multiplying the overtime rate (from Step 5) by the overtime hours worked. For example, if the employee worked 10 overtime hours: $28.125 per hour x 10 hours = $281.25 in overtime pay for that month.

Over time calculation: example

As mentioned, only the likes of nonexempt employees, like servers, retail associates, and carpenters, are eligible for overtime premium pay. Here's an example to show how to calculate overtime for monthly salary employees.

Emma is a server earning a monthly fixed salary of $2,400. One week, during her pay period, the restaurant was short-staffed, so she stayed longer to help with dinner service and ended up working 50 hours instead of her usual 40. This extra time is considered overtime work, and she will be paid for the additional hours.

To calculate Emma's overtime pay, divide her $2,400 monthly salary by 160 hours (based on a 40-hour workweek x 4 weeks) to get an hourly rate of $15. Overtime is paid at 1.5 times this rate, or $22.50 per hour ($15 x 1.5).

So, for 10 overtime hours, Emma will receive overtime pay of 10 x $22.50 = $225. Her total pay for that month would be $2,625 ($2,400 base pay + $225 overtime pay). Note: The calculation would be different for a weekly salary, as the hourly rate and overtime pay would change.

Speaking of employee pay, organizations use Salary.com's Compensation Software to easily manage and structure their salary systems.

Learning how to calculate overtime for monthly salary employees is important for accurate payroll management. Remember that before calculating, make sure the employee is an eligible nonexempt employee. Also, confirm the applicable overtime FLSA rules based on local labor laws or company policy.