Ensuring that your employees are paid appropriately and promptly for their work is one of the most important aspects of running a business. That is why calculating payroll correctly is so important. The most common elements of payroll calculation are hours worked, overtime, tax deductions, insurance premiums and retirement contributions.
Payroll calculations may vary from state to state and sometimes county to county. Keep in mind that it is the job of the business to properly structure the calculations to fit their business.
Any sort of mistake in payroll calculation can end up being very costly for the business, depending on the penalties. Improperly paying or being late on payments is a good way to lose your best employees.
How to Calculate Payroll for Hourly Workers
Paying hourly workers is a straightforward matter. A simple equation or payroll program can quickly determine gross income. In determining the proper equation, it is first important to understand the state’s payday requirements. For the case of this example, we will use a bi-weekly model.
Hours worked for week one (HW1) plus hours worked for week 2 (HW2) multiplied by the hourly pay (P) equals Total Pay (TP). (HW1 + HW2)P=TP.
For example, if employee A works 20 hours week one and 18 hours week two, and their hourly pay rate is 15 dollars, then the equation would look like (20 + 18)$15=$570.
If you need to calculate for overtime, it is a simple addition to the equation. If overtime pay is time and a half (1.5), then hours worked over time week one (HWO1) will be added to hours worked overtime week two (HWO2) and then multiplied by 1.5. The overtime rate and which hours qualify for overtime vary state to state.
For example if employee B works 40 hours week one with 5 hours of overtime and then works 40 hours week two with only 1 hour overtime, the equation would look like: (40 + 40)$15 + (5+1)($15×1.5)=$1335.
It’s also important to note that exempt employees are not eligible for overtime. This varies state to state.
Determining payroll for salaried workers is a bit easier because there are fewer variables to account for. Salary workers are paid an overall amount of the year, which is then broken into equal payments depending on the regularity of payments. Again, reviewing the state’s payday requirements will be crucial in determining the frequency of paychecks.
To calculate the proper pay here, take the employee’s total salary and divide it by the number of pay periods. If your employees are paid on the 1st and the 15th of each month, that would create 24 pay periods. If the employee is paid an annual salary of $75,000, then the equation would be a straightforward 75,000/24 = $3,125.
These deductions help determine your employees’ take-home, or net pay. This is how much your employee will have for their personal use after all taxes and benefits have been taken out. This is where payroll calculations get more complicated. Once again, some of it comes down to individual state, county and city laws, all of which impact tax deductions. Following proper tax rates for Social Security and Medicare is crucial for avoiding any mistakes. It is also necessary to calculate for state income tax if the state of operation charges a state income tax. Be sure to follow the employer’s tax guide when calculating for deductions.
Understanding all these variables is absolutely key to avoiding any miscalculations and the penalties that can accompany them.
Some employees will request voluntary deductions for various reasons, such as working multiple jobs or adjusting for a spouse’s income among other reasons. There will also be instances such as deductions for child support or wage garnishments.
It is up to the employer to see that these deductions are all paid to the proper government agency. Commission-based pay and bonus will also impact the deductions, so it is necessary to account for these.
Payroll can take time for any business. Because of the complexities of payroll, small and medium-sized businesses can save time, money and energy by outsourcing to a payroll firm. Other businesses may prefer to handle these matters in-house. In any case, once you understand how to calculate payroll, completing the payroll process becomes effortless.