What Does Overtime Really Cost?
The 1.5× premium, the taxes on top of it, and when overtime beats adding a new hire.
Overtime is one of the fastest ways for labor cost to climb without anyone deciding to spend more. Under federal law, most hourly employees must be paid 1.5× their regular rate for hours worked beyond 40 in a week. That premium is only the visible part — overtime also carries payroll taxes and, on the wage portion, sometimes workers' comp. This guide explains what overtime really costs and when it makes sense versus hiring.
You can add overtime dollars into your fully-loaded picture with the Employee Cost Calculator.
How overtime is defined
Under the federal Fair Labor Standards Act (FLSA), non-exempt employees earn overtime at 1.5× their regular rate for hours over 40 in a workweek. Some states add daily overtime rules (for example, over 8 hours in a day) or double-time thresholds, so always check your state. Exempt salaried employees generally do not earn overtime, but classification rules are strict — misclassifying an employee as exempt is a common and costly mistake.
The premium is bigger than it looks
A $25/hour employee earns $37.50 for each overtime hour. But overtime wages are still subject to Social Security and Medicare (7.65%) and often SUTA and workers' comp on the wage portion. So the true cost of that overtime hour is more like $40–$41, not $37.50. Benefits, by contrast, usually do not increase with overtime because they are fixed monthly costs — which is the one factor that can make overtime cheaper than adding a head.
Worked example: overtime vs. a new hire
Suppose you need an extra 500 hours of work this year. Two options:
| Option | Rough added cost |
|---|---|
| Overtime: 500 hrs at ~$40 loaded | ~$20,000 |
| New part-time hire (with its own taxes, comp, ramp-up, equipment) | Wage + full burden + one-time costs |
For a modest, temporary bump in work, overtime often wins because you avoid the one-time hiring costs and added fixed benefits. For a sustained increase, a new hire usually wins because paying a permanent 1.5× premium and risking burnout is more expensive over time. The break-even depends on how many hours, for how long, and how hard the role is to fill.
Watch the hidden costs of chronic overtime
Beyond the premium, sustained overtime brings fatigue, more errors and rework, higher injury risk (which can raise your workers' comp mod), and turnover. Those costs do not appear on the payroll report but are very real. A little overtime is a useful flex tool; a lot of it, week after week, is usually a signal that you need another person.
Compare overtime against a new hire →