# Exempt or non-exempt: overtime and minimum wage

> Exempt takes a $684-a-week salary and exempt duties. Marcus has neither, so his 16 October overtime hours cost $363.46.

Source: https://lopifi.com/learn/exempt-vs-non-exempt-employees
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is the difference between exempt and non-exempt employees?** Exempt takes a $684-a-week salary and exempt duties. Marcus has neither, so his 16 October overtime hours cost $363.46.

The tax rules decide what's withheld. A second law decides what's owed: the Fair Labor Standards Act sets a federal minimum wage — $7.25 an hour — and requires overtime for hours over 40 in a workweek, for every employee it doesn't exempt. A state or city minimum that's higher still applies; the FLSA excuses no one from it.

> “The federal minimum wage is $7.25 per hour effective July 24, 2009.”

— [US DOL, Wage and Hour Division — FLSA](https://www.dol.gov/agencies/whd/flsa), The Fair Labor Standards Act: minimum wage, overtime, records

> “No provision of this chapter or of any order thereunder shall excuse noncompliance”

— [29 U.S.C. §218(a)](https://www.law.cornell.edu/uscode/text/29/218), A higher state or local minimum wage still applies

## Exempt is a test, not a title

An [exempt employee](https://lopifi.com/md/glossary/exempt-employee) under the executive, administrative and professional exemptions passes two tests: a salary of at least $684 a week, and primary duties that meet the exemption. A 2024 rule that would have raised the salary level was vacated, and the Department of Labor enforces the 2019 level. Fail either test and the employee is [non-exempt](https://lopifi.com/md/glossary/non-exempt-employee), however they're paid.

> “Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay … Job titles do not determine exempt status.”

— [US DOL, Fact Sheet #17A (rev. September 2019)](https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime), Exemption for executive, administrative, professional, computer and outside sales employees — $684 a week

— [US DOL, overtime rulemaking (2024 rule vacated; 2019 regulations restored May 2026)](https://www.dol.gov/agencies/whd/overtime/rulemaking), The salary level in force: the 2019 rule's $684 a week

|  | Weekly salary | At least $684? | Duties | Status |
| --- | --- | --- | --- | --- |
| Priya Shah | 1,332.69 | Yes | Manages the operation, directs Marcus | exempt |
| Marcus Lee | 605.77 | No | Picks, packs and loads orders | non-exempt |

Northwind's two employees, by both tests.

Salaried, but below the weekly salary level — and picking and packing is not an exempt duty, so he would be owed overtime at any salary. He's salaried and non-exempt — which is allowed, and common. His salary is meant to cover 40 hours a week, so his [regular rate](https://lopifi.com/md/glossary/regular-rate) is his weekly salary over 40: 2,625 × 12 ÷ 52 ÷ 40, or about $15.14 an hour.

— [29 CFR §778.113](https://www.law.cornell.edu/cfr/text/29/778.113), The regular rate of a salaried employee — a monthly salary × 12 ÷ 52

## Overtime, one workweek at a time

Overtime is measured in a [workweek](https://lopifi.com/md/glossary/workweek) — a fixed, recurring seven days — and never averaged across two. Hours over 40 are paid at not less than 1.5 times the regular rate. In October the holiday stock arrives in the first and last weeks, and Marcus works 16 hours of overtime across 2 of them: $363.46 on top of his salary, paid with October's payroll.

> “at a rate not less than one and one-half times the regular rate at which he is employed.”

— [29 U.S.C. §207(a)(1)](https://www.law.cornell.edu/uscode/text/29/207), Overtime: hours over forty in a workweek

> “The Act takes a single workweek as its standard and does not permit averaging of hours over 2 or more weeks.”

— [29 CFR §778.104](https://www.law.cornell.edu/cfr/text/29/778.104), Each workweek stands alone

| Workweek | Hours | Over 40 | Overtime pay |
| --- | --- | --- | --- |
| Oct 4–10 | 46 | 6 | 136.30 |
| Oct 11–17 | 40 | 0 | 0 |
| Oct 18–24 | 34 | 0 | 0 |
| Oct 25–31 | 50 | 10 | 227.16 |

Marcus Lee's October, workweek by workweek.

**Exercise — Overtime, week by week.** Marcus Lee is salaried and non-exempt. His salary covers 40 hours a week, which makes his regular rate 15.14 an hour, rounded (his monthly salary × 12 ÷ 52 ÷ 40). For each October workweek, enter the overtime Northwind owes on top of the salary: every hour over 40, at one and a half times the regular rate. Use the unrounded rate and round the week's pay once. Type it in the workbook at https://lopifi.com/playground.

> **Overtime and the 2026 W-2.** For 2025 through 2028, employees may deduct up to $12,500 of qualified overtime compensation ($25,000 married filing jointly) on their own returns — the "half" in time and a half. It changes their income tax, not FICA: overtime is still wages for Social Security and Medicare, and employers report the qualified amount to the employee.

> “For tax years beginning after 2024 and ending before 2029, P.L. 119-21 allows individuals (employees and other workers not treated as employees) to deduct up to $12,500 ($25,000 if married filing jointly) of qualified overtime compensation from their income subject to federal income tax on their income tax returns.”

— [IRS Pub. 15 (2026), What's New — Qualified overtime compensation](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF), The overtime deduction, 2025 to 2028 — still subject to FICA

**Salaried exempt**
- Pro: No overtime, and no hours to track for pay
- Pro: Predictable payroll
- Con: Both tests must hold; a title alone fails
- Con: The duties are judged on the job as it's done, not the job description
- Best for: Roles whose primary duty is managing, or exempt professional or administrative work, paid above the salary level

**Salaried non-exempt**
- Pro: A predictable paycheck for the employee
- Pro: Overtime only in the weeks it happens
- Con: Hours still have to be recorded, every workweek
- Con: Overtime on top of the salary, at 1.5 × the regular rate
- Best for: A steady full-time role that doesn't meet an exemption

**Hourly non-exempt**
- Pro: Pay matches the hours worked
- Pro: Simplest overtime math
- Con: Payroll moves with the timesheet
- Con: Every hour must be paid at least the minimum wage that applies
- Best for: Variable or part-time hours

Three ways to pay the same role.

**Wrong:** Marcus averaged 42 hours over those two weeks, so 2 hours of overtime.

**Right:** Marcus worked 50 hours one week and 34 another: 10 hours of overtime are owed for the first.

Each workweek stands alone. A short week doesn't pay for a long one.

> **Exempt takes the salary level and the duties. Everyone else gets at least the minimum wage that applies and time and a half for hours over 40 in each workweek, salaried or not.**

## Where this lesson's rules come from

- [US DOL, Wage and Hour Division — FLSA](https://www.dol.gov/agencies/whd/flsa) — The Fair Labor Standards Act: minimum wage, overtime, records (agency)
- [US DOL, Fact Sheet #17A (rev. September 2019)](https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime) — Exemption for executive, administrative, professional, computer and outside sales employees — $684 a week (agency)
- [US DOL, overtime rulemaking (2024 rule vacated; 2019 regulations restored May 2026)](https://www.dol.gov/agencies/whd/overtime/rulemaking) — The salary level in force: the 2019 rule's $684 a week (agency)
- [29 U.S.C. §207(a)(1)](https://www.law.cornell.edu/uscode/text/29/207) — Overtime: hours over forty in a workweek (statute)
- [29 U.S.C. §218(a)](https://www.law.cornell.edu/uscode/text/29/218) — A higher state or local minimum wage still applies (statute)
- [29 CFR §778.104](https://www.law.cornell.edu/cfr/text/29/778.104) — Each workweek stands alone (regulation)
- [29 CFR §778.105](https://www.law.cornell.edu/cfr/text/29/778.105) — What a workweek is (regulation)
- [29 CFR §778.113](https://www.law.cornell.edu/cfr/text/29/778.113) — The regular rate of a salaried employee — a monthly salary × 12 ÷ 52 (regulation)
- [IRS Pub. 15 (2026), What's New — Qualified overtime compensation](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — The overtime deduction, 2025 to 2028 — still subject to FICA (irs)
- [Wikipedia, “Fair Labor Standards Act of 1938”](https://en.wikipedia.org/wiki/Fair_Labor_Standards_Act_of_1938) — Fair Labor Standards Act of 1938 (reference)

## Read further

- https://lopifi.com/md/startups/contractor-vs-employee

- **Track:** [Payroll](https://lopifi.com/md/learn/payroll)
- **Lesson:** Lesson 6 of 8 — 10 min
- **Terms taught:** [Exempt employee](https://lopifi.com/md/glossary/exempt-employee), [Non-exempt employee](https://lopifi.com/md/glossary/non-exempt-employee), [Workweek](https://lopifi.com/md/glossary/workweek), [Regular rate](https://lopifi.com/md/glossary/regular-rate), [Minimum wage](https://lopifi.com/md/glossary/minimum-wage)
- **Previous:** [Form 941, line by line, Payroll · Lesson 5](https://lopifi.com/md/learn/payroll-tax-returns/form-941-line-by-line)
- **Next:** [Recording payroll in the books, Payroll · Lesson 7](https://lopifi.com/md/learn/recording-payroll-journal-entries)
- **The course:** https://lopifi.com/md/learn