How to Correctly Calculate Overtime Pay Rates (2026)

Hourly Employees with Multiple Pay Rates

When an employee works two jobs for you at different hourly rates in the same week, federal rules give you two ways to figure overtime.

Option 1: Use the Weighted Average Rate

The standard method is the weighted average of the two rates. You divide the employee’s total straight-time earnings from both jobs by their total hours, then pay half that rate for each overtime hour.

Sally worked 30 hours at the front desk at $20 an hour and 15 hours cleaning at $17 an hour, for 45 hours in total.

Option 2: Use the Rate for the Work Done in the Overtime Hours

You and the employee can agree, before the work is done, to pay overtime at 1.5 times the rate for the job they actually did during the overtime hours. This is allowed under 29 CFR 778.419. The rate has to be a real rate you pay for that job during regular hours, and it can’t be below minimum wage.

Say Sally’s first 40 hours were 30 at the front desk and 10 cleaning, and her last 5 hours were cleaning.

This option costs less when the overtime hours fall in the lower-paid job and more when they fall in the higher-paid one. If Sally’s last 5 hours had been front desk work, she’d earn $905.00 for the week. Whichever method you choose, it’s smart to put the agreement in writing and apply it the same way every week.

How to Calculate Overtime With Bonuses

A nondiscretionary bonus must be added to the regular rate. Most bonuses fall into this group, including production, quality, attendance and safety bonuses. A bonus you announce in advance counts, even if you keep the right to cancel it.

Overtime Example With a Weekly Bonus

Darren ($18 an hour) worked 45 hours and earned a $90 production bonus for the week.

If you figured overtime on the $18 wage alone, you’d pay $945.00, which is $5.00 short.

Overtime Example With a Monthly or Quarterly Bonus

When a bonus covers more than one week, you can pay overtime on the regular wage each week and settle up once the bonus amount is known. Under 29 CFR 778.209, you spread the bonus back over the weeks it was earned and pay extra half-time for every week that had overtime. If you can’t tell which weeks earned it, divide it equally across the weeks (or hours) of the bonus period.

Darren earned a $650 quarterly safety bonus for a 13-week quarter. He worked overtime in two of those weeks.

Weeks without overtime need no adjustment. A truly discretionary bonus stays out of the regular rate entirely (see the table below).

How to Calculate Overtime With Commissions

Commissions count toward the regular rate, whether they’re an employee’s only pay or paid on top of an hourly wage or salary (29 CFR 778.117).

Rosa earns $16 an hour plus commission. She worked 48 hours and earned $192 in commissions for the week.

If commissions are figured monthly, pay overtime on the hourly wage each week. When the commission is paid, spread it back over the weeks it was earned and pay the extra half-time for each overtime week, the same way as the quarterly bonus above (29 CFR 778.119).

Salary Non-Exempt Employee Overtime Pay

A salaried employee who doesn’t qualify for an exemption is owed overtime like any hourly worker. First you turn the salary into an hourly regular rate, based on the hours the salary is meant to cover.

Overtime for a Salary Based on a 40-Hour Week

Joe is paid $46,800 a year for a 40-hour week. His job doesn’t pass the duties tests, so he’s non-exempt. This week he worked 50 hours.

For a monthly salary, multiply by 12 and divide by 52 to get the weekly amount. For a semimonthly salary, multiply by 24 and divide by 52 (29 CFR 778.113).

Overtime for a Salary Based on Other Fixed Hours

If the salary covers fewer than 40 hours, divide it by those hours. Extra hours up to 40 are paid at that rate, and hours over 40 at 1.5 times the rate. A $700 salary for 35 hours gives a $20 regular rate. In a 42-hour week, the employee earns $700 + (5 hours × $20) + (2 hours × $30) = $860.

If the salary covers a fixed schedule of more than 40 hours, the straight-time pay for those hours is already in the salary, so you owe only the extra half-time. A $990 salary for a 45-hour week gives a $22 regular rate. The 5 overtime hours add 5 × $11 = $55, for a total of $1,045.

California handles this differently. Its Labor Code sets the regular rate for a full-time salaried non-exempt employee at the weekly salary divided by 40 and treats the salary as pay for regular, non-overtime hours only. See our California overtime laws guide.

Fluctuating Workweek Method for Salaried Employees

The fluctuating workweek method (29 CFR 778.114) lets you pay a fixed weekly salary for every hour worked plus half the regular rate for each overtime hour. You figure the regular rate fresh each week, so it goes down as hours go up. You can use it only when all of these are true:

• The employee’s hours really do change from week to week.
• The employee gets the same fixed salary for any week they work, whether the hours are few or many.
• The salary is high enough to pay at least minimum wage for every hour in the longest week.
• You and the employee both understand that the salary covers every hour worked in the week, however many there are.
• You pay at least half the regular rate on top of the salary for each overtime hour.

A DOL rule that took effect August 7, 2020, confirmed that bonuses, commissions and other extra pay can be used with this method. They just have to be added to the regular rate. Maria earns a $1,000 weekly salary under this method. This week she worked 50 hours and earned a $100 bonus.

Overtime for Tipped Employees

If you take a tip credit, overtime is calculated on the full minimum wage. Under federal law, that’s $7.25 an hour, even when you pay a cash wage of $2.13. You also can’t take a bigger tip credit for an overtime hour than for a regular hour.

Jen is a server paid the federal $2.13 cash wage with the full $5.12 tip credit. She worked 50 hours this week.

A common mistake is multiplying the $2.13 cash wage by 1.5. That gives $3.195 an hour for overtime and $117.15 for the week, which underpays Jen by $25.60. If her tips don’t cover the tip credit you’re taking, you pay the difference.

Many states require a higher cash wage or don’t allow a tip credit at all. Check your state in our guide to tipped minimum wage by state and run the same math with your state’s numbers.

Payments You Can Leave Out of the Regular Rate

The regular rate includes all pay for work, except payments the FLSA specifically excludes. The rules are in 29 CFR 778.200 to 778.225, and the DOL summarizes them in Fact Sheet #56A and Fact Sheet #56C. A 2019 DOL rule, effective January 15, 2020, made clear that many common perks and benefits can be left out.

States With Daily Overtime Rules

Federal law only looks at hours over 40 in a workweek. A few states also require overtime based on the hours worked in a day:

• California: 1.5 times the regular rate after 8 hours in a workday and for the first 8 hours on the seventh consecutive workday in a workweek. Double time after 12 hours in a workday and after 8 hours on that seventh day.
• Alaska: 1.5 times after 8 hours in a day or 40 hours in a week, for employers with four or more employees.
• Nevada: 1.5 times after 8 hours in a 24-hour period for employees paid less than 1.5 times the state minimum wage. Since July 1, 2026, that means employees earning under $18.00 an hour.
• Colorado: 1.5 times after 12 hours in a workday or 12 consecutive hours, as well as after 40 hours in a week.

These states have exceptions for some industries and schedules. Our overtime laws guide covers the details. When state and federal rules both apply, you have to meet both, so pay whichever gives the employee more overtime.

No Tax on Overtime and Form W-2 Reporting for 2026

Under the One Big Beautiful Bill Act, employees can deduct qualified overtime compensation on their federal income tax returns for tax years 2025 through 2028. The deduction is up to $12,500 a year ($25,000 for joint filers), and it phases out above $150,000 of modified adjusted gross income ($300,000 for joint filers).

It’s an income tax deduction only. You still withhold income tax and pay payroll taxes, such as Social Security, Medicare and federal unemployment tax, on all overtime pay.

What Counts as Qualified Overtime

Qualified overtime is only the part of overtime pay the FLSA requires above the regular rate. For most employees, that’s the half-time premium. The IRS formula for each workweek is FLSA overtime hours × 0.5 × the FLSA regular rate.

• In Darren’s 50-hour week at $18 an hour, qualified overtime is 10 hours × $9 = $90.
• In Darren’s bonus week, qualified overtime is 5 hours × $10 = $50. Leaving the bonus out of the regular rate would understate it as $45.
• If you pay double time, only the FLSA-required half-time premium is qualified overtime.
• Overtime owed only under state law, such as California daily overtime in a week of 40 hours or fewer, doesn’t count. Neither does overtime paid only because of a union contract.
• Exempt employees have no qualified overtime, even if you choose to pay them extra for long hours.

How to Report Qualified Overtime on Form W-2

Starting with 2026 Forms W-2, which you’ll give employees in early 2027, report each employee’s total qualified overtime in Box 12 with code TT. Report the full amount, even if it’s more than the employee’s $12,500 deduction limit. For 2025, the IRS gave employers relief from this requirement in Notice 2025-69.

Accurate tracking matters because your employees can generally deduct only what you report. If you report too little, they’ll need a corrected Form W-2c from you to claim the rest. That means you need clean records of overtime hours and the correct regular rate, including bonuses and commissions, for every week of the year.

Keeping Overtime Calculations Accurate

Overtime math gets complicated quickly once bonuses, commissions and multiple pay rates come into play, and small errors add up. In 2025, the DOL’s Wage and Hour Division recovered more than $259 million in back wages for nearly 177,000 workers.

These habits help you get it right every week:

• Record every hour worked, including early starts, late finishes and work done after clocking out.
• Use one fixed workweek and figure overtime for each week on its own.
• Add nondiscretionary bonuses, commissions and shift differentials to the regular rate.
• Spread monthly and quarterly bonuses back over the weeks they cover.
• Track each employee’s overtime premium for Form W-2, Box 12, code TT.
• Keep payroll records for at least 3 years and time cards for at least 2 years.

Time clock software like TimeClick records straight-time and overtime hours for each workweek, so your payroll starts from accurate numbers and your records are there when you need them.

This guide is general information and isn’t legal advice. For questions about your situation, contact your state labor department or an employment attorney.