What Is Overtime? A Small Business Guide to the Rules
What overtime is and how it works. The 40-hour rule, exempt vs non-exempt, how to calculate time and a half, and what employers are required to pay.
Overtime
What it is, how many hours trigger it, and what you owe when it does
The first wage-and-hour scare of my career came from a spreadsheet. We had a salaried office coordinator, about $38,000 a year, who had quietly been working 48-hour weeks through a busy season. Someone asked, casually, whether she was owed overtime. My answer was confident and wrong: she is salaried, so no.
Salaried has nothing to do with it. She cleared the salary threshold, but her actual daily work was scheduling, ordering supplies, and answering the phone, which is not the kind of independent judgment the administrative exemption is built for. She was non-exempt, and we owed her eight hours of premium pay per week going back further than I wanted to count.
That is the shape of almost every overtime problem at a small company. Not fraud, not greed, just a wrong assumption held confidently for a long time. This guide covers what overtime actually is, how many hours trigger it, the difference between exempt and non-exempt, how to run the calculation, what records you are required to keep, the new tax deduction, and the mistakes I see most often at companies with 5 to 50 employees and nobody whose full-time job is HR.
What Is Overtime?
Overtime is the premium pay an employer is legally required to give a non-exempt employee for hours worked beyond 40 in a single workweek. Under the Fair Labor Standards Act, those hours must be compensated at no less than one and one-half times the employee's regular rate of pay. That is where the phrase time and a half comes from.
Two things in that definition do most of the work, and both get missed. The first is non-exempt. Overtime is not owed to everyone; it is owed to employees who do not fall within one of the FLSA exemptions, and that classification is where small businesses get into trouble. The second is hours actually worked. If the work happened and you knew or should have known about it, the premium is owed. Approval is a management question, not a payroll question.
Worth clearing up a common source of confusion: outside employment law, overtime means an extra period in a tied sporting event. That meaning has nothing to do with this one. When an employer, an employee, or the Department of Labor uses the word, they mean the wage obligation described here. The Fair Labor Standards Act guide covers the broader statute this rule lives inside.
How Overtime Works Under the FLSA
Overtime works on a workweek basis, and that single fact resolves most of the confusion around it. A workweek is a fixed and regularly recurring period of 168 hours, or seven consecutive 24-hour periods, per DOL Fact Sheet #23. It does not have to match the calendar week. It can start Wednesday at 6 a.m. if that suits your business. What matters is that you pick one and keep it.
The workweek is the unit of measurement, which produces the rule that trips people up most often: you cannot average hours across two weeks. An employee who works 50 hours one week and 30 the next has not worked 80 straight-time hours. They have worked 10 overtime hours plus a light week, and they are owed the premium for those 10 hours. This holds even if your pay period is biweekly and the two weeks land on the same paycheck.
A few other mechanics are worth knowing because they run against intuition. The FLSA sets no limit on how many hours an employee aged 16 or older can work in a week. It does not require premium pay for weekends, holidays, or nights as such. And overtime is generally due on the regular payday for the pay period in which it was earned, not whenever you get around to it.
How Many Hours Is Overtime?
Under federal law, overtime is every hour over 40 in a workweek. Hour 41 is the first overtime hour. There is no federal daily overtime rule, which means an employee can work a 12-hour day without triggering overtime, as long as their total for the week stays at or below 40.
This surprises people, and it is worth stating plainly because a lot of managers believe an eight-hour day is a legal ceiling. It is not, at the federal level. A four-day schedule of ten hours a day is 40 hours and carries no federal overtime obligation. What creates the obligation is the weekly total.
| Scenario | Hours Worked | Federal Overtime Owed? | Why |
|---|---|---|---|
| Four 10-hour days | 40 hours | No | The weekly total is 40. No federal daily rule applies. |
| Five 9-hour days | 45 hours | Yes, 5 hours | Five hours over the 40-hour weekly threshold. |
| One 14-hour day, then four 6-hour days | 38 hours | No | Long day, but the weekly total is under 40. |
| 50 hours, then 30 hours the next week | 80 across two weeks | Yes, 10 hours in week one | Hours cannot be averaged across workweeks. |
| 36 hours worked plus 8 hours of PTO | 44 paid hours | No | PTO is not hours worked. Only 36 hours were actually worked. |
| 45 hours, employee never got approval | 45 hours | Yes, 5 hours | Unauthorized hours are still compensable if you knew or should have known. |
The paid-time-off row catches people regularly. Overtime is calculated on hours worked, so a week with 36 worked hours and a paid holiday generally produces no overtime obligation even though the paycheck shows 44 hours. Your own policy can be more generous, but the FLSA does not require it. The guide to whether PTO counts toward overtime works through the variations.
When Your State Says Otherwise
The FLSA is a floor, not a ceiling. Where a state gives employees more protection, the state rule governs, and you have to follow whichever standard is more favorable to the employee. Two kinds of state variation matter for a small business.
The first is daily overtime. California, Colorado, Nevada, and Alaska require the premium after a set number of hours in a single day, independent of the weekly total. In a daily-overtime state, that four-day schedule of ten-hour days does create an obligation, even though it produces zero overtime under federal law. California layers on double time for very long days and rules for the seventh consecutive day.
The second is a higher salary threshold for exemption. Several states set a floor well above the federal $684 per week, and as of January 1, 2026 the thresholds in California, Colorado, Maine, New York, and Washington all exceed the federal level. An employee who is comfortably exempt under federal law can be non-exempt under state law purely on salary.
State thresholds move most years, usually tied to state minimum wage increases, so treat any figure you find as something to verify rather than memorize. If you employ people in California, Colorado, New York, or Washington, the compliance hub has state-by-state guides.
Exempt vs Non-Exempt: The Classification That Decides Everything
Every employee is non-exempt by default. Exemption is something the employer has to affirmatively prove, and proving it means clearing all three of the following tests. Failing even one makes the employee non-exempt and entitled to overtime.
The duties test is where nearly every misclassification at a small business originates. It is tempting to reason from the title inward: she is the office manager, managers are exempt, therefore no overtime. The DOL reasons from the work outward. What does she actually do all day? If the honest answer is scheduling, ordering, and answering the phone, the administrative exemption does not fit, and the title on the org chart will not save you.
| Exempt | Non-Exempt | |
|---|---|---|
| Entitled to overtime pay | ||
| Employer must track hours worked | ||
| Must be paid on a salary basis | ||
| Must meet a minimum salary level | ||
| Primary duties must pass a DOL duties test | ||
| Pay can be docked for partial-day absences | ||
| Can be hourly, salaried, piece-rate, or commissioned |
Note the row about tracking hours. It is not just a payroll convenience. For non-exempt employees, keeping an accurate record of hours worked is a legal requirement, and it is the evidence you will need if anyone ever disputes what they were owed. The exempt vs non-exempt guide works through each exemption category in detail.
Do Salaried Employees Get Overtime?
Frequently, yes. Paying someone a salary is a method of delivering wages, not a legal classification. A salaried employee is exempt only if they also clear the salary threshold and pass the duties test. Fail either one and they are a salaried non-exempt employee, which is a real and common category, and they are owed overtime like anyone else.
The salary threshold under federal law is $684 per week, or $35,568 annually, per the Department of Labor. The highly compensated employee threshold is $107,432 in total annual compensation. These are the 2019 levels; the 2024 rule that would have raised them was vacated in court, and the DOL issued a technical amendment in May 2026 formally confirming $684 as the operative standard. If you raised salaries in anticipation of the higher threshold, you are not required to roll that back.
Calculating overtime for a salaried non-exempt employee takes one extra step. You convert the salary to an hourly regular rate first: divide the weekly salary by the hours it is intended to cover. A $600 weekly salary meant to cover 40 hours produces a regular rate of $15, and hours over 40 are paid at $22.50. A fixed salary for a workweek longer than 40 hours does not discharge the obligation, so no arrangement that says the salary already includes overtime will hold up.
How to Calculate Overtime Pay
Overtime pay is the regular rate multiplied by 1.5, applied to every hour over 40 in the workweek. Here is the full calculation for an employee earning $20 an hour who worked 46 hours in a single week.
Both routes reach $980. You can pay straight time on all 46 hours and add a half-time premium on the 6, or pay 40 hours at $20 and 6 hours at $30. The DOL describes it the first way because that framing is what makes the tax deduction discussed below intelligible: the deductible piece is the half, not the whole overtime payment.
The Regular Rate Trap
The regular rate is not always the hourly rate on the offer letter. It is total compensation for the workweek divided by total hours actually worked, and it includes far more than base pay. Get this wrong and every overtime hour that week was underpaid, even though your multiplication was flawless.
Per DOL Fact Sheet #56A, the regular rate includes all remuneration for employment except a specific statutory list of exclusions. That means nondiscretionary bonuses have to be folded in: a production bonus, an attendance bonus, a bonus promised in advance for hitting a target. Shift differentials go in as well. So do commissions.
| Payment Type | In the Regular Rate? | What This Means in Practice |
|---|---|---|
| Base hourly wages | Yes | The starting point. For a straight hourly employee with no other pay, the regular rate is just this. |
| Nondiscretionary bonus | Yes | Promised in advance or tied to production, attendance, or a target. Must be allocated back across the weeks it was earned in. |
| Discretionary bonus | No | Truly at the employer's discretion, with no promise or formula communicated in advance. Rare in practice, since most bonuses are announced. |
| Shift differential | Yes | Extra pay for nights or weekends raises the regular rate for that week. |
| Commissions | Yes | Included, and allocated across the period they were earned. |
| Gifts and holiday presents | No | Excludable if the amount is not tied to hours, production, or efficiency. |
| Paid time off and holiday pay | No | Payments for time not worked are excluded from the regular rate. |
| Expense reimbursements | No | Reimbursing a cost incurred on the employer's behalf is not remuneration. |
The distinction between a discretionary and a nondiscretionary bonus is narrower than most founders assume. If you told the team in advance that hitting the quarterly number earns a bonus, it is nondiscretionary and it belongs in the regular rate. A genuinely discretionary bonus is one nobody could have anticipated. The discretionary bonus guide covers where the line falls, and the bonus guide covers how bonuses get taxed once you have paid them.
What You Have to Keep on File
The FLSA requires employers to preserve payroll records for at least three years, and to keep the records on which wage computations are based, meaning time cards and work schedules, for at least two years. This is not a filing preference. It is a legal requirement, and the records are your only defense if anyone ever disputes hours.
Understand what happens when the records are not there. If an employee claims they worked 48 hours and you have nothing to show otherwise, a court may accept the employee's own reasonable estimate. The absence of records does not create a tie; it hands the tiebreaker to the person who kept better notes, which in that scenario is not you.
The classification documentation is the piece almost everyone skips, and it is the one I would least want to be missing. The record retention guide covers what else falls under a retention clock, and the personnel file guide covers where each document belongs.
The Overtime Tax Deduction: What Employers Need to Know
Overtime is still taxed and still withheld exactly as it always was. What changed is on the employee's tax return, not in your payroll run, and the name of the provision has caused a great deal of confusion about that.
The One Big Beautiful Bill Act created a federal income tax deduction for qualified overtime compensation. Employees can deduct up to $12,500 per return ($25,000 for joint filers) of the premium portion of overtime required by the FLSA. Per the IRS guidance on the deduction, the deductible amount is the part that exceeds the regular rate, which is the "half" of time and a half. It is not the whole overtime payment.
The employer obligation here is real but narrow. For tax year 2025, separate reporting was not required and the IRS provided penalty relief. Starting with tax year 2026, employers are required to report qualified overtime compensation separately. That means your payroll system has to distinguish the FLSA-required premium from every other kind of overtime or premium pay you might hand out, which is a distinction most small businesses were not previously tracking.
The practical consequence is worth stating plainly: your employees may ask about this, and they may adjust their W-4 withholding because of it. Neither changes what you owe them. Nothing about the deduction alters the overtime obligation itself, and no employee can trade the deduction for a lower premium. The federal withholding guide covers what to do when someone submits a new W-4.
Common Overtime Mistakes Small Businesses Make
Six mistakes account for most of the overtime exposure I see at companies with 5 to 50 employees. None of them involve bad intent. All of them involve a reasonable-sounding assumption that turns out to be wrong.
The last one deserves emphasis because founders resist it hardest. An employee who works overtime you did not approve has broken your policy, and you can respond to that with a conversation, a warning, or termination. What you cannot do is decline to pay for the hours. The hours happened. The FLSA does not have an exception for hours the employer did not want. Enforce the policy through management and pay the wages either way. The disciplinary action guide covers how to handle the policy side.
Managing Overtime Without an HR Department
Everything above is knowable. The reason small businesses still get caught is not that the rules are unknowable, it is that nobody owns them. The classification decision gets made in a hiring conversation and never written down. The policy lives in an email. The hours live in a spreadsheet on someone's laptop. Three years later, under a DOL inquiry, none of it can be produced.
The fix is unglamorous and mostly organizational. Four things need a home:
| What Needs a Home | Why It Matters | What Happens Without It |
|---|---|---|
| Exempt or non-exempt status on the employee record | It determines whether overtime is owed at all, and it drives whether you have to track hours for that person. | Classification lives in someone's memory. New managers assume salary means exempt and the error propagates. |
| The written reasoning behind each exempt classification | Under audit you have to show why, not just what. Salary basis, salary level, and the duties test that applies. | You reconstruct the argument years later, from memory, against an investigator who does this full time. |
| A signed overtime policy for every non-exempt employee | Pre-approval rules and reporting requirements are what let you enforce the policy without withholding pay. | You cannot discipline for unauthorized overtime because nobody was ever told the rule existed. |
| Time records, preserved and retrievable | Two-year minimum for the records wage calculations are based on. They are your only defense in a dispute. | The employee's estimate of hours worked becomes the operative number, because you have nothing to counter it. |
This is the gap I built FirstHR to close. Employee profiles that carry exempt status and the classification reasoning, document management with e-signature for the overtime policy acknowledgment, and task workflows so a classification review actually happens before the offer goes out rather than after a complaint arrives. FirstHR is not a payroll or time-clock system, and the calculation itself belongs with your payroll provider. What it holds is the classification, the policy, the acknowledgment, and the paper trail, which is precisely the part that goes missing.
Start with an audit. Pull every salaried employee, check the three tests honestly, and write down the answer. It takes an afternoon and it is the highest-value HR hour a small business owner can spend. The HR audit guide covers the wider version of that exercise.
Frequently Asked Questions
What is overtime?
Overtime is the extra pay an employer owes a non-exempt employee for hours worked beyond 40 in a single workweek. Under the Fair Labor Standards Act, those hours must be paid at a rate of at least one and one-half times the employee's regular rate of pay, which is why it is commonly called time and a half. Overtime is a legal obligation rather than a bonus or a reward. If a covered employee works the hours, the employer owes the premium, whether or not the work was approved in advance.
How many hours is overtime?
Under federal law, overtime starts after 40 hours in a workweek. There is no federal daily overtime rule, so working ten hours in one day does not trigger overtime by itself as long as the weekly total stays at or below 40. Some states go further. California, Colorado, Nevada, and Alaska apply daily overtime rules that require the premium after a set number of hours in a single day. When federal and state rules differ, the employer follows whichever one is more favorable to the employee.
How does overtime pay work?
Overtime pay works on a workweek basis. You fix a recurring seven-day period of 168 hours, count the hours a non-exempt employee actually worked in that period, and pay one and one-half times their regular rate for everything over 40. The regular rate is total pay for the week divided by total hours worked, so it can be higher than the base hourly rate if the employee also earned a nondiscretionary bonus or a shift differential. Hours cannot be averaged across two weeks to avoid the premium.
After how many hours is overtime?
Federal overtime begins at hour 41 in the workweek. The first 40 hours are straight time, and every hour after that is paid at one and one-half times the regular rate. The count resets at the start of each new workweek. Note that this is the federal floor, not the whole picture. In states with daily overtime, the premium can kick in after 8 or 12 hours in a single day even if the employee never reaches 40 hours for the week.
Do salaried employees get overtime?
Often, yes. Being paid a salary does not automatically exempt someone from overtime. To be exempt, an employee must be paid on a salary basis, earn at least the salary threshold of $684 per week under federal law, and perform primary duties that meet the executive, administrative, or professional definitions. Failing any one of those three tests makes the employee non-exempt and entitled to overtime. A salaried employee earning below the threshold is owed overtime regardless of their job title or responsibilities.
What is the salary threshold for overtime exemption?
The federal salary threshold is $684 per week, which works out to $35,568 per year. The highly compensated employee threshold is $107,432 in total annual compensation, with at least $684 of that paid weekly on a salary basis. The Department of Labor issued a technical amendment in May 2026 confirming these 2019 levels as the operative federal standard after the 2024 rule was vacated in court. Several states set higher thresholds, and where a state floor is higher, the employer must meet the state level.
Can an employer refuse to pay for unauthorized overtime?
No. If an employee works the hours and the employer knew or should have known about it, the hours are compensable and the overtime premium is owed. An employer can require pre-approval for overtime and can discipline an employee who repeatedly ignores that policy, up to and including termination. What an employer cannot do is withhold pay for hours that were actually worked. The policy is enforced through management, never by refusing to pay earned wages.
Can I give comp time instead of paying overtime?
Generally not in the private sector. Compensatory time off in place of overtime pay is a public-sector arrangement with specific statutory conditions. A private employer that offers a non-exempt employee time off next week instead of the overtime premium this week is usually just failing to pay overtime. There is a narrow exception for time off taken within the same workweek, since the FLSA counts hours by the workweek, but any arrangement that carries hours across weeks is a compliance risk.
What are the penalties for not paying overtime?
Unpaid overtime exposes an employer to back wages plus liquidated damages equal to the amount of the underpayment, which effectively doubles the bill. Employees can also recover attorney's fees, and the Department of Labor can assess civil money penalties for repeated or willful violations. Willful violations can be referred for criminal prosecution. Because a misclassification usually affects everyone in the same role over a multi-year lookback, the exposure at a small company is rarely a single paycheck.
Is overtime taxed differently?
Overtime wages are withheld and taxed like any other wages. What changed is the tax return. The One Big Beautiful Bill Act created a deduction of up to $12,500 per return, or $25,000 for joint filers, on the premium portion of FLSA-required overtime. The deduction runs from tax year 2025 through 2028 and phases out above $150,000 of modified adjusted gross income ($300,000 joint). It does not change payroll withholding, but starting with tax year 2026 employers must report qualified overtime compensation separately.