Calculate, tax and pay overtime correctly

Overtime is part of everyday work in many industries, but the correct recording, calculation and compensation regularly raises questions. Both employers and employees must be aware of the legal framework in order to avoid conflicts and act in accordance with the law. In this guide, you will learn what overtime is, how it is calculated and taxed, which compensation models exist and how you can use digital tools to minimize administrative work.

What is overtime? Definition and legal basis

Overtime is working time that exceeds the contractually agreed working time. While this definition sounds simple at first, the legal classification is complex: Although the Working Hours Act (ArbZG) regulates the maximum limits of daily working hours, it does not directly regulate the concept of overtime.

After Section 3 ArbZG The working day must not exceed eight hours. It can be extended up to ten hours if an average of eight hours is not exceeded within six calendar months or 24 weeks. These additional hours are often referred to colloquially as overtime. However, under employment law, this is initially overtime.

Whether and under what conditions overtime must be worked depends on various factors:

Contractual regulations: The employment contract may provide for overtime and limit its scope. If such a clause is missing, there is generally no obligation to work overtime, except in emergencies.

Collective agreements and works agreements: Collective agreements or works agreements often regulate in detail when overtime may be ordered, how it is paid and what maximum limits apply.

Order by employer: As a rule, overtime must be ordered or at least tolerated by the employer. Extra work done on your own initiative does not automatically create a claim for compensation.

The documentation requirement for working hours was reinforced by the Federal Labour Court and ECJ case law. Employers are required to systematically record the entire working time of their employees. This expressly includes overtime.

How does overtime occur in everyday working life?

In practice, overtime is caused by various reasons, which are often mutually reinforcing:

Project stress and deadlines: Especially in project-oriented industries such as IT, Consulting or agency business Tight schedules and customer commitments regularly result in extra work. When critical project phases are pending or unexpected issues arise, teams often resort to overtime to meet deadlines.

Staff shortages: Illness absences, vacancies or vacation periods stress the remaining employees. The work still needs to be done. The result: overtime for colleagues present.

Inefficient processes: Lack of automation, unclear responsibilities, or missing time management result in tasks taking longer than necessary. Here, overtime is not caused by actual work peaks, but by organizational deficiencies.

Cultural factors: In some corporate cultures, long working hours are considered a sign of commitment. This implicit pressure causes employees to work overtime, even when it is not factually necessary.

Unforeseen events: Technical faults, urgent customer inquiries or last-minute changes can make spontaneous additional work necessary.

The systematic recording of this overtime is not only required by law, but also makes economic sense. Only those who can transparently understand when and why overtime is required can identify structural problems and take countermeasures.

Calculate overtime: formula & examples

Overtime is calculated on the basis of the contractually agreed working time. The basic formula is:

Overtime = Actual working time — Agreed working time

A practical example illustrates the calculation:

An employee has contractually agreed to a 40-hour week spread over five working days. In a specific week, she works as follows:

• Monday: 9 hours
• Tuesday: 8.5 hours
• Wednesday: 9 hours
• Thursday: 10 hours
• Friday: 7.5 hours

The actual working time is 44 hours. With a target working time of 40 hours, this results in 4 overtime hours for this week.

To calculate compensation, you first need the hourly wage. With a monthly salary of 3,600 euros gross at full time (40 hours/week), the result is:

Hourly wage = monthly salary/(working week × 4.33)

In this case: 3,600 euros/(40 × 4.33) = around 20.79 euros per hour

If the employment or collective agreement provides for an overtime supplement of 25 percent, the pay rate per overtime is:

20.79 euros × 1.25 = 25.99 euros

For four hours of overtime, the employee would receive an additional 103.96 euros gross.

For part-time workers, the calculation is the same, but the target working time is based on the individually agreed reduced number of hours. Here too, the following applies: Only hours above the contractually defined working time count as overtime.

It is important to differentiate between different working time models. With flexitime or trust-based working time there are other rules for the definition of overtime, which should be set out in the employment contract or a works agreement.

Overtime calculator: It's that easy online

Online overtime calculators offer a quick way to calculate additional work. Such tools work according to a simple principle: You enter your target working time, the actual hours worked and optional additional rates and the computer automatically calculates the overtime and its remuneration.

Most free calculators on the Internet take into account the following parameters:

• Agreed weekly working hours or monthly target hours
• Actual hours worked
• hourly wage or monthly salary
• Overtime allowance in percent

Some advanced calculators offer additional features such as Calculation of night, Sunday and public holiday surcharges or the automatic consideration of break times.

The advantages of such online tools are obvious: they are quickly available, free of charge and require no installation. They are very useful for occasional calculations or to check your own statement.

However, simple computers quickly reach their limits when it comes to more complex working time models. Flexitime, shift work, different supplement regulations or individual collective agreement agreements are difficult or impossible to represent with standard tools. In addition, they do not meet the legal documentation requirement for working hours.

Companies therefore need professional overtime management for legally secure and systematic overtime management Time tracking systems, which not only calculate, but also seamlessly document, evaluate and integrate into payroll.

Tax treatment: How is overtime taxed?

Overtime benefits are generally subject to regular income tax and social security contributions. They are treated as normal pay and increase taxable income. There is no general tax exemption for overtime under German tax law. Taxation is based on the employee's personal tax bracket.

‼️ Attention ‼️

Since overtime benefits are often paid out in addition to the regular monthly salary, this can result in a higher tax burden — particularly as a result of the progression of the income tax rate.

Supplements for extra work may be tax-exempt under certain conditions if they are paid for Sunday, public holidays or night work. However, the tax exemption does not apply to the basic payment of overtime itself, but exclusively for surcharges:

• Night work (20:00 to 6:00): Surcharge of up to 25 percent tax-free
• Sunday work: supplement of up to 50 percent tax-free
• Public holiday work: Surcharge of up to 125 percent tax-free (up to 150 percent for special holidays)

These supplements are also free of social security contributions, provided that they do not exceed the stated limits and are paid in addition to the salary already owed.

When paying out accumulated overtime in the form of a one-off payment, the so-called fifths rule can be Section 34 EStG are used. This provision is intended to alleviate the additional tax burden due to extraordinary income. Whether this advantage applies depends on various factors and should be clarified with a tax advisor on a case-by-case basis.

It is important for employers: All overtime payments must be correctly shown in the payslip and reported to the tax authorities and social security institutions. Clean documentation protects against additional requirements during operational audits.

Compensation and compensation: money or free time?

The question of whether overtime is paid out or compensated by compensation for time off is determined by various levels of regulation. In principle, employees are entitled to compensation for their overtime, provided that this has been ordered or approved by the employer.

Legal basis: Without an express contractual provision, there is a right to payment of overtime. The Federal Labour Court has repeatedly ruled that overtime is not automatically compensated with salary, unless this is clearly agreed and the remuneration is commensurate with the amount of work done.

Contractual regulations: Employment contracts, collective agreements or works agreements often determine how overtime is compensated. Typical models include:

• Payout with or without a surcharge
• Compensation of time off in a ratio of 1:1 or with time credit supplement
• Combination of money and free time above certain thresholds
• Overtime accounts with compensation periods

Reconciliation of time off in practice: Many companies prefer to balance time off for a number of reasons. It saves the budget, promotes work-life balance and prevents excessive workload. Employees benefit from additional days off, which they can use flexibly.

However, there are also disadvantages: If operational business does not allow time off, overtime accumulates. When the employment contract is terminated, unbalanced overtime must then be paid out. With corresponding financial burdens for the employer.

Workers' right to vote: Whether employees can choose between payout and time off depends on the applicable agreements. Such voting rights are enshrined in many collective agreements, often with the restriction that the decision must be valid for a specific period of time.

Observe expiry dates: Overtime is subject to cut-off periods resulting from employment contracts, collective agreements or works agreements. Without appropriate regulation, the Statutory limitation periods of three years. Workers should file their claims in good time to lose their claim.

Transparent time recording forms the basis for any compensation — whether in money or free time. Only when overtime is fully documented can claims be proven beyond doubt and fair solutions can be found.

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Overtime allowance: When is the flat rate scheme worthwhile?

The overtime allowance is a compensation model in which a fixed monthly amount is paid that covers a specific number of hours of overtime. This model is often found in employment contracts of specialists and managers whose working hours are more difficult to plan.

How it works: The employment contract, for example, provides that ten hours of overtime per month are paid with the basic salary. If there is more overtime, this is paid in addition or compensated by time off. If there is less, the employee still keeps the full lump sum.

Legal limits: Case law places high demands on the effectiveness of overtime allowances. The clause must be transparent so that the employee can see how much overtime is covered with what amount. General wording such as “The salary covers all overtime” is generally ineffective.

In addition, the remuneration must be appropriate. In the case of low salaries, an overtime allowance may be ineffective if the relationship between basic pay and expected additional work is unreasonable. As a rule of thumb, the higher the salary, the more likely the case law is to accept blanket regulations.

Benefits for employers: Planning security in terms of personnel costs and lower billing costs speak in favour of this model. Especially in industries with fluctuating workload, this makes it possible to react more flexibly to work peaks.

Benefits for workers: The lump sum is also paid in quieter phases when there is actually less overtime. This creates income security.

Disadvantages and risks: There is a risk that there will be systematically more overtime than the lump sum covers without additional compensation. Employees should therefore document their working time even with lump sum agreements in order to be able to prove when the agreed limit is regularly exceeded.

In such cases, claims for additional payments may arise despite a lump sum clause. Case law assumes that a lump sum can only cover an appropriate amount of extra work; continuous structural overload justifies additional claims.

Whether an overtime allowance is worthwhile depends on the specific structure and the actual work situation. Both sides should regularly review and adjust the agreement as the framework conditions change.

Avoiding overtime: tips for efficient time management

The best solution to overtime problems is to prevent them from happening in the first place. While some extra work is unavoidable, a significant part can be achieved through better organization and prioritizing avoid.

• ‍Realistic planning: Many overtime hours result from overly optimistic time estimates. If you plan buffer times for unforeseen problems and realistically calculate expenses, you reduce pressure on employees. Project management tools help to plan capacities transparently and identify overloads at an early stage.‍
• Prioritization and delegation: Not every task is equally important. The Eisenhower Matrix helps to differentiate between urgent and important activities. What is neither urgent nor important should be delegated or deleted altogether. Managers must learn to hand over responsibility instead of wanting to do everything themselves.‍
• Minimize disruptions: Constant interruptions due to emails, phone calls, or spontaneous meetings destroy concentrated work. Fixed times for email processing, focus times without disruptions and a structured meeting culture create space for productive work.‍
• Use automation: Recurring administrative tasks can often be automated. From time recording to reporting to invoicing, there are digital solutions that take over routine work and create time for value-adding activities.‍
• Learn to say no: Anyone who accepts any additional task runs the risk of taking over. Clear communication about your own workload and realistic promises protect against overload.‍
• Breaks and relaxation: Paradoxically, continuous stress results in lower productivity. Regular pauses, adequate sleep and recovery times increase performance and reduce the need for overtime.‍
• Transparent communication: Teams should talk openly about workload. If it is communicated early on that deadlines are unrealistic, solutions can be found, whether through prioritization, additional (external) resources or postponed deadlines.‍
• Data-based analysis: Systematic time recording shows where time actually goes. Evaluations often reveal that a lot of time is spent on meetings or administrative activities that could be made more efficient.

Companies that consistently implement these principles not only reduce overtime, but also increase employee satisfaction and long-term productivity.

Digital time recording: Automatically record & evaluate overtime

The manual recording of working hours on paper or Excel lists is error-prone, time-consuming and no longer meets current legal requirements. Digital time tracking systems offer a modern solution that both meets the legal documentation requirement and provides valuable insights into work processes.

Automatic overtime calculation: Modern time recording software automatically calculates overtime on the basis of individual employment contracts. The system knows the target working time of each employee and determines in real time when extra work is required. This eliminates calculation errors and saves time in the HR department.

Flexible recording options: Employees can record their working time via various channels — whether on a desktop PC, via a smartphone app or via special time tracking terminals. This flexibility is particularly important for teams working in the field, working from home or with changing locations.

Project allocation: Especially in project-oriented companies, it is important to know which overtime is required for which project. ZEP enables the simultaneous recording of working time and project allocation. This makes it possible to transparently see whether certain projects systematically lead to extra work and where processes need to be optimized.

Overtime account: Digital systems maintain an individual overtime account for each employee. Employees can see their current status at any time, apply for time off and keep track of their workload. Executives receive notifications when critical thresholds are exceeded.

Integration into payroll: The direct connection to payroll systems such as DATEV saves double entry and reduces sources of error. Overtime and supplements are automatically included in the payslip.

Compliance and legal certainty: The complete documentation of all working hours meets the legal requirements of ECJ case law and the Federal Labour Court. In the event of a dispute or during tax audits, companies can prove that they have properly recorded their time.

Evaluations and reports: The collected data enables detailed analyses. Which departments work the most overtime? At what times do work peaks pile up? Are there any seasonal patterns? These findings help to identify and counteract structural problems.

Employee self-service: Modern systems give employees autonomy. You can apply for time corrections yourself, request time off compensation or enter absences. This relieves the HR department and increases acceptance of the system.

The investment in a professional time recording system pays off quickly. Not only by saving time in administration, but also by avoiding legal risks and improving the control of work processes.

ZEP in practice: Comprehensive solution for overtime management

With the module absences & overtime ZEP offers a comprehensive solution for employers who Requirements of the Federal Labour Court want to implement in a compliant manner. The software simplifies the management of overtime and ensures transparency and legal certainty in calculation and billing — for both part-time and full-time employees.

• ‍Automated overtime calculation and administration: ZEP enables the automatic recording and calculation of overtime by storing individual standard working hours per employee. The comparison with time recording ensures that overtime is immediately identified and precisely documented. The system automatically manages one overtime account per employee and offers flexible management of compensation periods or overtime payments.‍
• Intelligent overtime capping: A particular advantage of ZEP is the ability to work overtime based on contractually agreed limits. In monthly financial statements, contractually included overtime is automatically deducted, so that there is no double payment. This feature is particularly important for companies with overtime payments or all-in contracts.‍
• Clear documentation of absences: Complete documentation of absenteeism is essential for the fair and legally compliant billing of overtime. ZEP supports this with a precise absenteeism overview, which manages absences in the calendar and between different categories such as illness, parental leave or unpaid vacation differentiates. Employers benefit from a transparent overview of absences and can ensure that all data is correctly included in the calculations.‍
• Optimized vacation and leisure compensation planning: ZEP makes it easier to manage vacation and time off compensation claims through seamless integration of vacation requests into the calendar, automatic notifications during approval processes, and a real-time overview of remaining vacation days. Employees can directly apply for compensation periods for overtime, which significantly simplifies coordination and planning within the team.‍
• Clear evaluations: ZEP offers comprehensive evaluation options that enable a clear presentation of overtime and absenteeism balances. Managers and HR departments can see at a glance where action is needed, which employees are overworked and how overtime is distributed across different departments or projects.

With ZEP, employers implement BAG requirements for overtime pay in an efficient and legally secure manner. Automated processes and a clear overview keep you in control of working hours and absences at all times.

conclusion

Overtime is a reality in many companies, but requires clear regulations and transparent documentation. Anyone who knows the legal basis, correctly calculates and pays overtime and uses modern time recording tools creates legal certainty, transparency and fairness for both sides. Digital solutions not only reduce administrative costs, but also provide valuable data for better personnel planning and process optimization.