How to Calculate Payroll? [+ Free Templates]

Errors or delays in payroll processing can have negative effects on any business. To avoid any unwanted consequences, it’s important to learn how to calculate payroll and ensure that those calculations are always 100% accurate.  

Luckily for you, calculating payroll is not that complicated and can be done in 3 easy steps. While we’ll show you how you can do it manually, you can also just use the My Hours Payroll Template to quickly and easily calculate payroll.

How to Calculate Payroll? [+ Free Templates]
In this guide, you’ll learn:
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3 Easy Steps to Calculate Payroll

1. Calculate the Total Worked Time and Gross Pay

The first step to calculating payroll is to accurately determine how many hours every employee has worked during the specific pay period (presumably the one you want to calculate the payroll for). After you get the number of work hours, you can use that info to calculate the gross pay of your employees.

There are two main types of employees that you’ll have to consider when determining payroll:

  • Salaried employees
  • Hourly employees

How to Calculate Work Time and Gross Pay for Salaried Employees?

Salaried employees are usually paid the same amount of money for each pay period they work at a company, with two exceptions:

  • They got a raise
  • They worked overtime

Let’s take a look at the first case and say that one of your employees got a raise of $10,000 to their annual salary and that your regular pay period is once a month. To calculate their gross salary for the month all you have to do is divide $10,000 with 12 (months in a year).  

10,000 / 12 = 833

In this situation (and with these numbers), you should add 833 dollars to the original monthly pay of that employee. 

If they worked overtime, the situation is a little bit different, and the calculation will depend on how you value and track those work hours. If you’re from the US, there are a lot of labor laws that regulate how overtime is tracked (it's usually 1,5 times the regular hourly rate). 

Now, even though your employee is technically working for a fixed salary, there are situations where you'll have to pay them for overtime, depending on the specific laws and regulations in your country, state, or region. To calculate overtime for payroll purposes, you have to multiply the regular hourly pay by the overtime rate and then multiply that number by the number of overtime hours. For example, if you’re from the US, where the overtime rate is usually 1,5, the calculation will look like this: 

Regular hourly pay is $10

Number of overtime hours is 15

10 x 1,5 x 15 = 225

In this case, the amount you should add to their regular monthly pay is $225.

How to Calculate Work Time and Gross Pay for Hourly Employees?

Calculating the total work time for hourly employees for the purposes of payroll requires a bit more effort (some extra math) but is, in reality, not that difficult. To do it, you’ll need just two numbers for every hourly employee you have:

  • The total number of their work hours
  • Their hourly pay

With these two, you can easily do the necessary calculations and figure out how much gross pay is equal to. And, just like the previous example, we’ll assume that the pay period is once a month. 

Week 1 No. of hours = 27,5 

Week 2 No. of hours = 35

Week 3 No. of hours = 17

Week 4 No. of hours = 39,4

Hourly rate = $12

(27,5 + 35 + 17 + 39,4) x 12 = 118,9 x 12 = 1426,8 

In this case, an hourly employee has worked a total of 118,9 hours in one month and has earned $1,426 (and 80 cents) in gross pay. Please note that having accurate numbers is the most important when calculating the pay of hourly employees. That’s the only way to ensure you’re not under or overpaying them, and that you comply with different time-tracking laws

Some hourly employees will be eligible for overtime, if that’s the case, just refer to our calculation for overtime above.

Bonus tipA time-tracking app is a convenient and reliable way to track the work hours of hourly employees. 

2.  Determine Deductions and Taxes

To learn how to calculate payroll, you’ll have to familiarize yourself with various types of deductions and taxes applicable in your region, country, or state. Before you pay your employees, you are legally obligated to subtract non-tax and tax deductibles from employees’ gross pay.

The most common non-tax deductibles include:

  • Health, dental, and various other types of insurance premiums 
  • Commuting and travel costs
  • Alimony and child support 
  • Union fees

Let’s say that 8% of your employee's monthly pay goes to the non-tax deductible column. To calculate how much exactly that is, you need to multiply their pay by 8% (0,08 when converted). For someone making $1,200 a month, 8% of their pay would be:

1,200 x 0,08 = 96

The most common tax deductibles include:

  • Federal and state income taxes 
  • Local or county income taxes
  • Social security fees (usually around 6% of the gross salary)
  • Government health insurance fees (for example, Medicare has 1,45% tax) 

Before calculating taxes, you should subtract the non-taxable expenses from the gross pay. Let’s assume that the taxes are at 12%. In that case, the calculation will look something like this:

1,200 - 96 = 1,104 (taxable pay)

1,104 x 0,12 = 132,48 (taxes)

3. Finally, Calculate Payroll

After you’ve calculated the employee's gross pay and have determined both non and tax-deductible expenses, all that’s left to do is calculate payroll. You can do that by subtracting both the non-taxable and taxable expenses from the employees' gross salary. Keeping our previous example in mind, that will probably look like this:

1,200 - 96 - 132,48 = 971, 52

In this case, the amount of money you should pay out to your “example” employee is $971,52.

3 Main Ways to Calculate and Record Payroll

There are different ways and methods you can use to record and calculate payroll. Most of them can be separated into three main categories:

1. The Fully Manual Method

This is the most time-consuming method to record and calculate payroll. It involves going through every piece of data for every single employee (work hours and rates) and doing all of the calculations manually — pen and paper method. It's not inherently a bad way to calculate payroll, per se, but because of the amount of time and effort it requires, it can be considered outdated. 

If you have more than 10 employees, you should probably think about other solutions, as this one will have you spending a lot of time doing administrative work (and math).

2. The Excel/Google Sheets Way

Using Excel sheets is another popular method of calculating payroll. The main downside of this is the steep learning curve. Meaning if you don’t have any prior experience using Excel sheets, it will be easy to get lost in the rows, columns, and over 450 different functions and formulas. This method is prone to human error, and you'll also have to manually update the sheets for every pay period.    

Another alternative you can use is Google Sheets, which is similar to Excel in many ways. The main difference between them is that Sheets are cloud-based. They’re also easier to share and let you collaborate and save input in real-time, but the software has fewer functions than Excel — so it’s easier to use but limited. Google Sheets also has a learning curve, a little less steep than Excel. For those who want to get into either Excel or Google Sheets, we recommend starting your journey with templates. That way, you can use this software to start calculating your payroll immediately. 

If you want a template to easily calculate employees' payroll, feel free to use one of ours!



3. Using Digital Software

Using modern digital solutions is by far the most practical method to calculate payroll that is streamlined and substantially minimizes the risk of error. You can use project management or time-tracking software, depending on your specific needs.

For example, you can use the My Hours app to automatically track and record work hours (the data you’ll need to calculate payroll) and to seamlessly export that data into payroll information. You can use it to track attendance and absences, and can also include overtime hours (which will save you time on doing additional calculations).

Check out this guide if you want to learn more: How to Track Time.

WEEKLY timesheet