Those of you who’ve worked in the retail or restaurant industries know how it feels to be on your feet for more than 40 hours a week: not good, even with the comfiest shoe inserts.
A great way to ease your soreness? A larger-than-normal paycheck.
When you’re learning how payroll works in your small business, it’s essential to know when you owe employees overtime pay.
Overview: What is time and a half?
Most hourly employees who work more than 40 hours in a week are entitled to overtime pay, which comes at a rate higher than their standard hourly rate.
The Fair Labor Standards Act (FLSA) requires overtime pay for certain employees. Once an eligible employee works 40 hours in a week, additional hours must be paid at a minimum overtime rate of time and a half, which is 1.5 times an employee’s regular hourly wage.
For example, if Jess is typically paid $15 per hour, that means she makes $22.50 per hour with time and a half ($15 × 1.5).
Some states take the FLSA’s overtime rules a step further to enforce overtime pay for employees who work more than eight, nine, or 10 hours in a day. Check with your state’s labor department to learn about the overtime pay rules that apply to your business.
Though it’s not required, employers often pay time and a half on all hours worked on holidays to soften the blow of missing out on a day off. So, if Jess worked an eight-hour shift on July 4, a holiday in the U.S., she’ll make $180 ($22.50 × 8 hours) instead of her normal $120 ($15 × 8 hours).
Overtime and holiday pay are taxed the same as regular hourly wages. The business pays employer payroll taxes such as FUTA and one-half of Medicare and Social Security on the full amount of an employee’s paycheck. You include your employees’ overtime earnings as part of your payroll deduction on your small business taxes.
When you do payroll, your payroll software should prompt you to enter the number of hours each non-exempt employee worked. From there, you can break out which hours are subject to the employee’s standard and time and a half rates.
Who qualifies for time and a half?
Not every employee is entitled to overtime pay. Exempt employees:
- Have jobs that fall into one of six categories, such as administrative and executive
- Are paid salaries (not paid hourly)
- Earn more than the FLSA exempt minimum ($35,568 annually)
Those are the rules. But as your English teacher told you in grammar school, there’s an exception for nearly every rule.
If the Department of Labor (DOL) considers the employee “highly compensated” — i.e., earning at least $107,432 a year — but he or she does not qualify under one of the six role types, that employee is still exempt, or not eligible for overtime pay.
Non-exempt employees are entitled to overtime pay. They’re paid hourly wages and don’t work in executive or administrative roles. Think of restaurant, retail, and construction workers.
Consult our guide to exempt and non-exempt employees for definitions of the six exempt role types. During the hiring process, be sure to clearly state whether the position is exempt or non-exempt.
How does time and a half work for exempt employees?
When a salaried employee works more than 40 hours per week, you don’t owe any overtime pay as long as he or she earns more than the annual minimum of $35,568, which shakes out to $684 per week.
The DOL periodically changes the FLSA minimum for exempt employees, meaning some previously exempt positions no longer qualify. A position that was exempt last year might not be this year. Monitor positions that pay around $684 weekly to make sure you’re not falling out of compliance. If you notice a previously exempt position no longer meets the 2020 salary minimum, you can either pay that employee FLSA overtime or increase his or her salary.
You can also cushion your employee’s pay with a bonus or commission that doesn’t exceed 10% of his or her base salary. The bonus needs to be distributed at least quarterly.
For example, say you have an exempt employee who’s paid $30,000 per year. To reach the earnings minimum, consider upping her salary to $36,000 per year. A 10% bonus only gets you to $33,000 ($30,000 × 1.1), which won’t help you reach the annual minimum.
Even if your exempt employees make above the FLSA minimum, consider offering additional vacation time, called comp time, after an employee has had a long week.
How to calculate time and a half
The time and a half formula is:
(Standard Hourly Rate) × 1.5 = Time and a Half Rate
Let’s say you’re the owner of Ryan’s Wing Shop. (I’m hungry, can you tell?)
Take a look at your employees’ earnings history for last week:
Tina worked fewer than 40 hours last week, so none of her pay is subject to overtime. Austin and Sophie are entitled to overtime pay on their hours over 40. Let’s calculate their gross pay, which is their earnings before taxes. Gross pay is usually the top line on a paystub.
When calculating gross pay with overtime, use this formula:
Gross Pay = Standard Wages + Overtime Wages
The FLSA requires that you pay time and a half on hours worked over 40, not all of their hours worked for the week. You pay four hours of overtime for Austin (44 – 40) and 10 hours for Sophie (50 – 40). You pay their standard hourly rate up to 40 hours.
Austin’s time and a half rate is $18 ($12 × 1.5). Sophie’s is $25.50 ($17 × 1.5).
As mentioned above, some states take the FLSA overtime rules a step further and apply a daily overtime limit. In Alaska, California, and Nevada, a person who works more than eight hours in a day is entitled to overtime for any additional time.
Let’s look at how Tina’s hours were split up last week:
If Ryan’s Wing Shop is located in California, Tina is entitled to overtime pay on the additional four hours worked between Tuesday and Wednesday.
Tina’s time and a half rate is $30 ($20 × 1.5). Let’s calculate her gross pay.
When you opt to pay time and a half to an exempt employee, you need to convert that person’s annual earnings to an equivalent hourly rate. From there, you calculate the time and a half rate the same as an hourly employee.
For example, let’s say a salaried employee who earns $52,000 per year makes $1,000 per week ($52,000 ÷ 52 weeks). When you divide weekly earnings by a standard 40-hour work week, you get the equivalent hourly rate of $25 per hour.
If the employee worked 45 hours last week, and you’re paying time and a half for overtime, here’s how you’ll calculate gross pay:
Time and a half is the standard
It’s part of the payroll process to keep track of the number of hours each employee works. When you pay overtime, time and a half is the minimum overtime pay rate allowed in the United States.
View more information: https://www.fool.com/the-blueprint/payroll/time-and-a-half/