Calculate Pay for Hourly Employees:
- Calculate Gross Pay
Calculate Gross Pay for hourly employees by multiplying the pay rate times the number of hours worked in the pay period, and including payment of overtime at 1.5 times the pay rate. (Overtime must be paid at a minimum of 1.5 times the pay rate for every hour worked over 40 hours in a week.}
- Calculate Withholding
Calculate the amount of withholding for each employee based on the W-4 Form the person completed and using IRS Circular E (Employer's Tax Guide). The IRS online withholding calculator is for employee estimates of withholding.
- Calculate Social Security and Medicare Deductions
Calculate the Social Security and Medicare deductions by multiplying each employee's "social security pay" (gross pay less certain exemptions) by 7.65% (5.65% for 2011; the Tax Relief Act reduces employee withholding for 2011 only). NOTE! Any gross pay over the Social Security maximum for the year is not subject to Social Security taxes, but all pay is subject to Medicare taxes.
- Calculate State and Local Income Taxes
Calculate state and local taxes as determined by your state and local taxing entity.
- Other Deductions
Deduct other amounts as agreed to by the employee, including charitable donations, insurance premiums, and contributions to qualified retirement plans.
To calculate pay for salaried employees:
- Calculate Gross Pay
Gross pay for salaried employees is calculated by dividing the annual salary by the number of pay periods in a year. For example, if an employee has an annual salary of $35,000 and employees are paid every other week (that is, 26 pay periods in a year), his or her gross pay will be $1346.15 per pay.
- Calculate Withholding and Deductions
Calculate federal and state withholding, Social Security/Medicare deductions, and other deductions in the same way as for hourly employees.
Create an earnings report for each employee and report gross earnings, withholding and deduction amounts, and net pay for each payroll and for year-to-date.
