How to Calculate Payroll: An Ultimate Guide

Deciding how to calculate the payroll of your business is essential. Paying employees is something you can’t cut corners with. You need to make sure the calculation of payroll is correct. Payroll calculations that are off can add extra time and expenses to the cost of doing business. Turnover might be higher if you do not create an efficient system for how to calculate payroll.

Thankfully your company can determine how to calculate payroll using manual methods or technological ones. Whatever way you decide how to calculate payroll at your company just ensure it is strategic. You want to do it correctly every time. You’ll avoid fines and have happy employees receiving accurate paychecks.

How To Calculate Payroll

As your company decides on payroll calculations that work for you and your employees make sure to follow these steps. Each part of calculating payroll is vital. Double-check your payroll calculations formula has all these steps before finalizing your payroll system.

1. Determine Total Time Worked for the Period

The payroll process at your company begins by adding up how much time each employee worked in a given date range. Hourly employees will have payroll calculations that total hours and minutes worked. Salaried workers have a standard amount of agreed upon work time which makes their payroll calculations standard from period to period.

Setting a pay schedule is essential for how to calculate the payroll. Decide as a company how to calculate payroll on a weekly, biweekly, monthly, or other basis. Stick to that schedule when determining how to calculate payroll.

2. Calculate Gross Pay (Before Deductions & Taxes)

Once you have correctly added up each employee’s time the next part of the payroll process involves gross pay. This is the full amount employees earn prior to taxes and deductions. The basic payroll calculation formula equals their rate of pay multiplied by their amount of time worked.

Solidifying how to calculate the payroll at your company for gross totals is pretty straightforward. Just know that payroll calculations for gross totals include other income types like overtime, tips, and bonuses

3. Determine Your Payroll Deductions

Subtracting deductions from employees’ gross pay is a crucial part of doing payroll at your company. The law requires this within your calculator of payroll.

Create a full list of deductions for each employee. Figure out if the deductions are pre-tax or post-tax. It is important to note that there is a separation between taxes and payroll deductions. Payroll processes vary from company to company. Clearly lay out deductions factored into the process as you calculate the payroll for your staff.

Add up the grand total of payroll deductions for a final sum. When deciding how to calculate the payroll take into account insurance, retirement contributions, and other potential deductions offered by your company. This will streamline how to calculate the payroll each time.

4. Find the Sum of Payroll Taxes

Payroll calculations include the total amount of taxes owed by each of your employees. This becomes complicated if you are not using a payroll calculator. Employees usually complete a W-4 tax form when hired. This form lets you know how to calculate the payroll for them based on their tax status.

The Internal Revenue Service (IRS) has information to assist with payroll laws and rules for employees. Knowing what income percentage to withhold for Social Security and Medicare is very important. Being up to date on the local, state, and federal tax requirements is key to how to calculate the payroll at your business.

According to the website for the IRS, “the current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.” 

5. Subtract Deductions & Taxes From Gross Pay

As you finalize the payroll for each employee you must start with the gross total. Look at your payroll calculations for the full non-tax deductions amount. Bring in the final sum of taxes and deduct the withholds from each employee’s gross pay.

Follow this guide for how to calculate payroll. It protects you and your company. Correctly knowing how to calculate payroll avoids employee lawsuits, tax penalties, and errors in payment.

How Understanding Payroll Can Help Grow Your Business

Now that you know how to calculate payroll, set up an ongoing calendar and system so that there is uniformity in your process in the full accounting cycle each month. This will make it easier for you to do accurate payroll calculations each time. Give your employees peace of mind with payroll.

Correctly knowing how to calculate the payroll for your company saves you time and money. With accurate payroll calculations, you can determine whether or not you have enough funds to bring on additional personnel. Costs are calculated in advance. There is more money on hand to determine if roles can expand. You can decide if business can take the next step of growth.

Having an accurate and consistent way for how to calculate the payroll system shows a clearer view of where your business stands. Taxes, expenses, and staffing amounts reflect in your payroll calculations formula accurately. From there, you have more information and insight for where your business can go in the future.

Conclusion

Once your company knows your payroll system you can focus on other parts of your business. Making sure your company knows how to calculate payroll frees up you and your employees to do the best job possible. 

There are so many tasks to take care of when you have your own small business and group of employees. Running it day to day can often be challenging for a variety of reasons. Having an accurate and reliable system for calculating payroll makes it just a little easier.

Frequently Asked Questions