When you have hourly employees, a busy week may cost more than a normal week. You might owe your non-exempt employees a different rate of pay for every hour they work over 40 that week.
The extra amount you’ll owe comes down to three things: who's exempt, what their regular rate of pay is, and what their state requires on top of the federal floor.
Those are worth sorting out before your next payroll, since overtime mistakes tend to apply to a whole job classification rather than one person. Here's how each piece works, so you can ace it the first time.
What is overtime?
Overtime is the extra pay your non-exempt employees earn when they work more than 40 hours in a workweek. Under the Fair Labor Standards Act (FLSA), you owe them at least one and a half times their regular rate of pay for every hour past 40.
What counts as a workweek?
A workweek is any seven consecutive 24-hour periods, fixed in advance and repeating on the same schedule. You choose when it starts. It doesn't have to match the calendar week, and it can begin on any day, at any hour, as long as you set it and keep it consistent.
Once you've designated it, each workweek stands alone. You can't average hours across two weeks to stay under 40. An employee who works 50 hours one week and 30 the next has earned 10 hours of overtime, even though the two-week total is 80. That holds whether you run payroll weekly, biweekly, or semi-monthly.
There are two caveats to know at a federal level:
The FLSA doesn’t have a daily threshold. An employee can work a 14-hour shift without earning overtime as long as their weekly total stays at or under 40.
There’s no ceiling on hours. Federal law doesn't limit how many hours an employee 16 or older can work in a week. You just have to pay overtime on everything past 40.
Who qualifies for overtime pay?
Overtime is the default under the FLSA. An employee is entitled to it unless they fit one of FLSA's exemptions. Also, a good rule of thumb is that if you pay someone by the hour, they're non-exempt and they earn overtime.
To be exempt from overtime under the most common exemptions, an employee has to pass all three of these tests:
Salary basis. You pay them a predetermined, fixed amount each pay period that doesn't shrink based on the quality or quantity of their work.
Salary level. Their weekly salary is at least $684, or $35,568 a year.
Duties test. Their job duties fit one of the exempt categories: executive, administrative, professional, computer employee, or outside sales.
If the employee fails any one of the three, they are non-exempt, which means you owe them overtime.
One exception: outside sales employees don't have to meet either salary test. If someone's primary job is making sales away from your place of business, they can be exempt no matter what or how you pay them.
Revisit classification when someone's role changes. Pull your list of salaried employees, check each one against all three tests, and write down why each exempt role qualifies. That way, next year's review is easier. If any role is a close call, talk to an employment attorney in your state.
Once you've classified your employees, Gusto calculates overtime for the non-exempt ones based on the policy you assign them, so the right rate applies to every payroll.
How do you calculate overtime pay?
Take the employee's regular rate, multiply it by 1.5, and pay that for every hour past 40 in the workweek.
If you have an employee whose regular rate is $20 an hour, their overtime rate is $30 (1.5 × $20). If they work 50 hours one week, here's what you owe:
40 regular hours × $20 = $800
10 overtime hours × $30 = $300
Total: $1,100
This is the calculation to use when someone earns a single hourly wage and nothing else.
Is an employee's regular rate the same as their hourly wage?
Sometimes, but not always. If they also earn nondiscretionary bonuses, shift differentials, or commissions, those get folded in and push the regular rate above the hourly wage, so you’ll owe more per overtime hour.
When you use Gusto for payroll, Gusto folds extra pay into the regular rate for you and manages overtime calculations from there—including recalculating if you add a bonus after the fact.
Do states have different overtime rules?
Often, yes. Federal law sets the floor for overtime pay, and states can require overtime in situations the FLSA doesn't. Some states also have looser overtime regulations. When the two rules differ, you apply whichever one pays the employee more.
States with stricter overtime rules than federal law
Under federal law, only weekly hours matter, but five states count the day, which means an employee can earn overtime in a week where they never hit 40 hours.
State | Daily overtime rule |
Alaska | 1.5× after 8 hours in a day. Some small employers and job categories are excluded. |
California | 1.5× after 8 hours in a day, 2× (double-time pay) after 12 hours. On the 7th day of a workweek, 1.5× for the first 8 hours regardless of how many hours were worked on the previous six days, and 2× beyond 8. |
Colorado | 1.5× after 12 hours in a day, or after 12 consecutive hours. |
Nevada | Employees earning less than 1.5× the state minimum wage earn 1.5× after 8 hours in a 24-hour period. |
Oregon | Manufacturing employees earn 1.5× after 10 hours in a day. |
Kentucky counts consecutive days of work instead. If you permit an employee to work all seven days of a workweek, the hours worked on that seventh day are paid at time and a half. The rule doesn't apply when the employee isn't permitted to work more than 40 hours that week.
Several states also set a higher salary floor for exempt employees than the federal $684 a week, including California, New York, Washington, Colorado, Maine, and Alaska. A higher floor can mean that a salaried employee who'd be exempt under federal rules may still earn overtime in those states.
Gusto supports daily, weekly, double-time, and seventh-day overtime rules, so you can set up policies that match what your state requires and have overtime calculated correctly, every payroll.
States with looser overtime rules than federal law
Even though these states have lighter overtime rules, these exemptions won’t do much for your payroll costs if your business is under the FLSA.
Hawaii exempts anyone earning a guaranteed $4,000 or more per month from its state wage and hour law, with no duties test attached.
Vermont exempts retail and service establishments, hotels, motels, restaurants, and seasonal amusement businesses.
Kansas sets its state overtime threshold at 46 hours and Minnesota at 48 hours.
To see how your employees’ states compare, start with the Department of Labor's state minimum wage and overtime table or contact the state labor agency directly.
What do employers get wrong about overtime?
The four most expensive overtime mistakes are assuming you only owe overtime you approved, offering time off instead of overtime pay, treating a salary as automatic exemption, and believing the 2025 tax law made overtime tax-free. The facts below clarify.
1. You still have to pay for overtime you didn't approve
If a non-exempt employee works more than 40 hours, you owe the overtime whether or not you authorized it. DOL is explicit that even if you say overtime has to be approved to be paid, it doesn't affect an employee's right to compensation for hours they worked.
You can still manage the problem going forward. Pay what was worked, then fix the schedule, the staffing, or the workload so it doesn't happen again.
2. Exchanging comp time for overtime pay isn't an option for private employers
Offering an extra day off next week doesn't satisfy the overtime requirement, even when the employee would rather have the time. The FLSA reserves compensatory time off for public agencies.
3. A salary doesn't make someone exempt
Salary is only one of three exemption tests, and an employee has to clear all three. Someone earning below $684 a week, or whose duties don't fit an exempt category, is a salaried non-exempt employee and earns overtime like anyone else.
4. Overtime is still taxed
Social Security, Medicare, and most state income taxes still apply to every dollar of overtime.
The One Big Beautiful Bill Act created a federal income tax deduction your employees can claim, but it's not an exemption. An overtime hour splits into straight time at the regular rate, which is taxed normally, and the premium half, which is deductible. The deduction covers only the overtime premium (roughly a third of the overtime check), caps at $12,500 for single filers and $25,000 for joint filers, and expires after the 2028 tax year.
For most workers the tax benefit is small: Gusto's analysis of over a million employees found the median overtime earner saves about $20 a year, roughly $1 per paycheck.
None of this changes what overtime costs you in payroll. The deduction applies to your employees' income tax, not to payroll taxes, so your share of Social Security and Medicare still applies to every overtime dollar including the premium.
You also have a new reporting obligation:
Starting with tax year 2026, you're required to report qualified overtime compensation separately on Form W-2 in Box 12 using code TT, per the IRS instructions for Forms W-2 and W-3. Report the full qualified amount even if it exceeds what your employee can deduct.
Only overtime the FLSA required counts. If you pay a premium under state law or your own policy, that portion stays out of Box 12.
Gusto tracks the qualifying premium and reports it in the right box, so your employees get the figure they need without you calculating it by hand.
FAQs
Does the FLSA apply to my small business?
The FLSA covers your business if it has at least two employees and $500,000 or more in annual sales or business done. Below that threshold, individual employees are still covered if their work regularly involves interstate commerce—handling goods from other states, making interstate calls, or processing credit card transactions. Most small businesses end up covered one way or the other.
Can I require employees to work overtime?
Yes, in most cases. Federal law sets no cap on hours for employees 16 or older and gives employees no right to refuse assigned overtime, so you can require it and discipline someone who declines. But many states restrict mandatory overtime for nurses and healthcare staff, and union contracts often limit it too.
Do I have to pay overtime for weekend or holiday work?
Not automatically. Federal law doesn't require holiday pay or overtime for work on Saturdays, Sundays, or a regular day of rest as such, only for hours past 40 in the workweek. If weekend work pushes someone over 40, you owe overtime on those hours. California is one exception, requiring premium pay on a seventh consecutive workday.
Do part-time employees get overtime?
Yes. The FLSA draws no distinction between full-time and part-time employees. A part-time non-exempt employee who works more than 40 hours in a single workweek earns overtime for every hour past 40, regardless of their usual schedule.
When do I have to pay overtime wages?
Overtime is due on the regular payday for the pay period in which it was earned. You can't defer it to a later pay period or hold it until a project wraps up. If a bonus earned that week raises the regular rate, the additional overtime is owed once the amount can be determined.
How long do I have to keep overtime records?
Three years for payroll records, and two years for the records behind them (like time cards, work schedules, and wage rate tables). You need hours worked each day, total hours each workweek, the regular hourly rate, and total overtime earnings for every non-exempt employee. Any format works, including electronic, as long as it's complete and accurate.
