How To Do Payroll Calculations? Complete Guide for Employers

Farwah Jafri | March 24 2023

As an employer, payroll calculations seem daunting at first, but with the right information, it can be a straightforward process. Several factors to consider when calculating payroll include hours worked, taxes, and employee benefits. Understanding the legal requirements and regulations surrounding payroll is important to avoid any potential issues or penalties.

Additionally, payroll calculation software can streamline the process and provide accurate calculations. By taking the time to understand payroll and implementing the right tools, employers can ensure their employees are paid accurately and on time. It leads to a happier and more productive workforce. In this article, we will guide you through the steps of calculating payroll manually.

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Initial considerations for payroll calculations

There are several initial considerations to keep in mind when calculating payroll for your employees. Here are some key ones:

1. Employee Information: You need accurate and up-to-date information on all your employees, including their full name, Social Security number, address, and tax withholding information. This will ensure that you can calculate their pay accurately and withhold the correct tax amount.

2. Pay Frequency: You have to determine how often you will pay your employees, such as weekly, biweekly, or monthly. This will impact how you calculate their pay and taxes.

3. Employee Classification: Another point you must consider while performing payroll calculations is classifying an employee. You need to classify your employees correctly as either exempt or non-exempt for overtime pay purposes. This will affect how you calculate their pay and any overtime pay owed.

4. Deductions: You have to consider any deductions that need to be made from an employee’s paycheck. The deduction includes, Social Security, Medicare, and any voluntary deductions like retirement contributions or health insurance premiums.

5. Wage and Hour Laws: You must comply with federal, state, and local wage and hour laws. This includes minimum wage requirements, overtime pay, and meal and rest break rules.

6. Timekeeping: You need to have a system in place for tracking employee time worked, whether it’s through manual timecards or an automated system. This will ensure that you accurately calculate employee pay based on hours worked.

7. Payroll Taxes: You must ensure that you withhold the correct amount of federal, state, and local taxes from each employee’s paycheck. This includes income taxes, Social Security taxes, and Medicare taxes.

Considering these initial considerations, you can ensure that your payroll calculations are accurate and compliant with applicable laws and regulations.

How To Calculate Payroll Manually

Following are the steps to follow while calculating payrolls manually:

Step 1: Collect Information

The first step for payroll calculations is to gather all the necessary information. This includes the number of hours worked by each employee, their hourly rate, any overtime hours, and any deductions or benefits that need to be considered.

Step 2: Calculate Gross Pay

The next step for payroll calculations is to know the gross pay for each employee. Gross pay is the amount of money an employee gets before any deductions or taxes are taken out. To calculate gross pay, multiply the hours worked by the employee’s hourly rate. For example, if an employee worked 40 hours at an hourly rate of $15, their gross pay would be 40 x $15 = $600.

Step 3: Calculate Overtime Pay

If an employee worked overtime during the pay period, you must calculate their overtime pay. Overtime pay is typically 1.5 times the employee’s regular hourly rate for any workweek worked over 40 hours. For example, if an employee worked 45 hours in a week at an hourly rate of $15, their regular pay would be $600, and their overtime pay would be (45 – 40) x 1.5 x $15 = $112.50.

Step 4: Calculate total Deductions

The total deductions are amounts taken out of an employee’s salary for taxes, Social Security, Medicare, and any other benefits the employee may have signed up for. To calculate deductions, you must know the current tax rates and other applicable rates for the benefits offered. For example, if an employee’s gross pay is $600 and is subject to a 10% tax rate and a 6% Social Security tax rate, their total deductions would be $60 + $36 = $96.

Step 5: Calculate Net Pay

The net pay is the amount of money an employee receives after all deductions and taxes have been taken out. To calculate net pay, subtract the total deductions from the gross pay. For example, if an employee’s gross pay is $600 and their deductions are $96, their net pay would be $504.

Step 6: Prepare Paychecks

The final step in calculating payroll manually is to prepare paychecks. You can do this by writing a physical check or transferring the money electronically. Be sure to include all necessary information on the paycheck, such as the employee’s name, the pay period, the gross pay, deductions, and net pay.


Calculating payroll manually can be time-consuming, but it is essential to ensuring that employees are paid accurately and on time. By following the steps shared above, you can easily calculate payroll manually. However, if you find the process too complex or time-consuming, consider using a payroll software program to simplify the process.

Read Also: How Are Payroll Taxes Calculated – A Step-By-Step Guide

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Author Bio

Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.