How To Calculate Payroll? Small Business Guide
To calculate payroll 💲,
- Begin by gathering employee data including hours worked.
- Calculate gross wages by summing hourly rates with overtime, or divide annual salary by pay periods for salaried employees.
- Deduct taxes and contributions accurately to determine net pay.
- Alternatively, use payroll calculation software for automated and streamlined processing.
Payroll accuracy is not just about ensuring employees are paid correctly and on time; it also impacts a company’s compliance with tax laws and regulations.
Consequently, businesses of all sizes, from small enterprises to large corporations, are turning to automated employee payroll software.
That’s why small businesses and even huge enterprises opt to use an employee payroll software.
Why?
Well, an automated payroll software resolves the following issues for both employees and employers,
Accuracy: Manual payroll calculations are prone to errors, leading to overpayments, underpayments, and compliance issues.
Time Efficiency: Automated payroll software streamlines the process by automating calculations, generating payslips, and filing tax forms.
This saves time for HR departments, allowing them to focus on other essential tasks and improving overall efficiency.
Compliance: Automated payroll software helps ensure compliance by automatically updating tax rates and rules, calculating deductions accurately, and generating reports required for regulatory purposes.
Here are the top 7 picks we think are the best payroll calculation software solutions!
| Best Payroll Calculation Software | Top 7 Picks 📜 | |
| Buddy Punch | Best Payroll Solution With Time Tracking | Read The Full Review |
| FreshBooks | Best Accounting Software For Businesses | Read The Full Review |
| Quickbooks | Best Accounting Software With Taxing | Read The Full Review |
| Gusto | Best Cloud-based HR & Payroll Services | Read The Full Review |
| Rippling | Best Integrated HR & IT Platform | Read The Full Review |
| Paycor | Best Comprehensive HR & Payroll Software | Read The Full Review |
| BambooHR | Best HR Software For SMBs | Read The Full Review |
Try Buddy Punch For Free
| What is Payroll? |
| Payroll refers to calculating and distributing wages and taxes to company employees. It encompasses various aspects, including calculating gross wages, deducting taxes and other withholdings, and distributing net pay to employees. It involves compliance with different tax laws and regulations, making it essential for businesses to maintain accurate records. |
Know Basic Payroll Terms
Following are the basic payroll terms every employee and employer should know.
1. Gross Pay
Gross pay is the total amount of money an employee earns before any deductions are made. It includes regular wages and any overtime pay, bonuses, or commissions earned during a pay period.
2. Net Pay
Net pay is the amount of money an employee receives after subtracting all deductions from their gross pay.
Understanding net pay is essential for employees to budget effectively and for employers to ensure that employees are paid accurately and in compliance with tax laws and regulations.
3. Hourly Employee
An hourly employee is an employee who is paid an hourly wage for the number of hours worked.
Hourly employees are typically non-exempt from overtime pay regulations, which means they are entitled to overtime pay if they work more than a certain number of hours a week.
4. Salaried Employee
Salaried employees are typically exempt from overtime pay regulations, which means they are not entitled to overtime pay even if they work more than a certain number of hours a week.
Calculating payroll for salaried employees is straightforward, as their pay remains constant regardless of hourly fluctuations.
5. Overtime
Overtime pay is additional compensation for employees for hours worked beyond the standard workweek or workday.
Employers must accurately calculate and pay overtime to eligible employees to comply with labor regulations.
6. Deductions
Deductions are subtracted from the gross income to determine the employee’s take-home pay.
These deductions can include various items such as taxes, insurance premiums, and retirement contributions.
How to Calculate Payroll? Complete Guide
Now that you have an understanding of basic payroll terms, here’s a complete guide on how to calculate payroll for employees.
1. Gathering Employee Information
To calculate payroll accurately, start by collecting essential employee data. For hourly employees, record the number of hours worked during the pay period.
For salaried employees, note their annual salary and divide it by the number of pay periods in a year to determine the gross pay for the pay period.
| Formula | Description |
| For hourly employees: | Number of hours worked = Total hours worked during pay period. |
| For salaried employees: | Gross pay = (Annual salary) / (Number of pay periods in a year). |
2. Calculating Gross Wages
To calculate gross wages, begin by summing up the total hours worked by each employee during the pay period.
For hourly employees, multiply the total hours worked by their hourly rate.
For salaried employees, divide their annual salary by the number of pay periods in a year to determine their gross pay for the pay period.
| Formula | Description |
| For hourly employees: | Gross wages = (Total hours worked) × (Hourly rate). |
| For salaried employees: | Gross wages = (Annual salary) / (Number of pay periods in a year). |
3. Deducting Taxes and Contributions
Deducting taxes and contributions correctly helps determine the employee’s net pay, which is the final amount they receive after all deductions have been made.
Subtract federal, state, and local income taxes based on the employee’s withholding status and the tax brackets for the relevant jurisdiction.
| Formula | Description |
| Net pay | Gross pay – (Federal income tax) – (State income tax) – (Local income tax) – (Other deductions). |
4. Net Pay Calculation
Calculating net pay accurately is essential for employees and employers to know how much they will receive to ensure accurate payroll processing.
Voluntary deductions can include health insurance premiums, retirement contributions, and any other benefits chosen by the employee.
| Formula | Description |
| Net pay | Gross pay – (Federal income tax) – (State income tax) – (Local income tax) – (Other deductions). |
5. Utilize Payroll Software
By utilizing payroll software, you can streamline your payroll process, minimize errors, and ensure compliance with tax laws and regulations.
Consider using payroll software or online calculators to simplify the payroll process and reduce errors.
6. Compliance With Labor Laws and Regulations
It’s important to ensure compliance with labor laws and regulations when calculating payroll.
This includes adhering to minimum wage requirements, accurately calculating and paying overtime, and withholding the correct amount of taxes.
Best Automated Payroll Calculation Software | Top 7 Options
Following are the best automated payroll software options.
1. Buddy Punch | Best Payroll Calculation Software
Buddy Punch is a popular payroll solution that businesses of all sizes and industries use.
With Buddy Punch, companies can easily track employee hours, calculate wages, and manage payroll taxes and deductions.
Buddy Punch stands out from manual and other payroll solutions due to its simplicity and efficiency.
Unlike manual payroll processing, which is time-consuming and error-prone, Buddy Punch automates payroll calculations, reducing the risk of mistakes.
1. Automated Payroll Processing
The software integrates seamlessly with time tracking, ensuring accurate payroll calculations based on hours worked.
It offers employee self-service features, allowing employees to easily access pay stubs and tax forms.
Buddy Punch offers various methods for employees to clock in and out, including PINs, QR codes, facial recognition, and more, ensuring flexibility and convenience.
2. Employee Self-Service
Employee self-service empowers employees to manage their payroll information, such as viewing and printing pay stubs, accessing tax documents, and updating personal information like addresses and direct deposit details.
3. Direct Deposit
Direct deposit allows employees to manage their payroll information independently.
They can access and download pay stubs, view tax documents, and update personal details like addresses and direct deposit information.
4. Expense Tracking
The expense tracking feature allows businesses to track and manage employee expenses efficiently.
The system integrates seamlessly with payroll processing, ensuring that approved expenses are included in the payroll calculations.
5. Payroll Tax Filings
The comprehensive features include efficient payroll tax filings, making it a top choice for businesses seeking simplicity and accuracy in their payroll processes.
With Buddy Punch, users can easily manage and track their payroll taxes, ensuring compliance with all relevant regulations.
6. Multi-State Tax Registration
Multi-state tax registration capability makes it ideal for businesses operating across various states, simplifying the complex process of managing payroll taxes across different jurisdictions.
The software’s intuitive interface and comprehensive tools streamline the payroll process, making it easier for businesses to manage their multi-state operations.
7. Unlimited Payroll Run
Unlimited payroll runs allow businesses to process payroll as often as needed without incurring extra costs or restrictions.
The flexibility is particularly beneficial for companies with varying pay schedules or temporary staff, as it allows them to adapt to changing needs without limitations.
8. Integrated Timesheets
Integrated timesheets streamline the payroll process and reduce errors associated with manual time tracking and data entry.
The functionality allows businesses to track employee hours and automatically incorporate them into payroll seamlessly.
9. W-2s and 1099s
W-2s and 1099s feature simplify the generating and distributing tax forms to employees and contractors.
Users can easily access and generate W-2s and 1099s directly from the system, reducing the time and effort required for manual processing.
10. Printable Checks
The feature streamlines the payroll process by allowing users to quickly print checks directly from the system, eliminating the need for manual check writing.
Users can customize check layouts, add company logos, and print checks in bulk.
11. Employee Self-Onboarding
With employee self-onboarding, new employees can enter their information, complete tax forms, and provide banking details, all within the secure Buddy Punch platform.
The feature saves time for HR departments and ensures accuracy and compliance with legal requirements.
Buddy Punch’s Online Reviews
As of the writing date, Buddy Punch has 4.8 out of 5 stars and 940 reviews on Capterra.
Below, we’ll list just a few reviews that speak to Buddy Punch’s ease of use and great customer support service. (Click here to explore the full list of reviews.)
“We needed a new solution for timekeeping and Buddy Punch came through! Onboarding and integration was so easy. Once I figured out all the setting options, it’s really easy to customize to exactly what you need. Employees love using it because it’s so straight forward to use.”
Click here to read the full review
“BuddyPunch has been very helpful and I am glad my organization made the switch from our previous tracker to BuddyPunch. As mentioned earlier, the ease of use of BuddyPunch is what separates it from a lot of competitors.”
Click here to read the full review
“Easy to clock in from anywhere and still manage how much time you’ve worked in a day. Easily tells you when you’ve gone past 8hrs, and also great for seeing when your team members are clocked in or out.”
Click here to read the full review
Try Buddy Punch for Free
Ready to give Buddy Punch a try?
For free trial, no credit card required.
If you feel that Buddy Punch might be the right fit for your business, sign up for a 14 day free trial (no credit card needed). You can also book a one-on-one demo, or view a pre-recorded demo video.
2. FreshBooks
FreshBooks is an accounting software designed for small businesses and self-employed professionals to manage their finances efficiently.
It provides a range of features to help users with invoicing, expense tracking, time tracking, and financial reporting.
Key Features,
- Invoicing
- Expense Tracking
- Time Tracking
- Project Management
- Estimates
- Financial Reporting
- Online Payments
- Mobile App
- Client Portal
- Integration with other tools
Freshbooks has a rating of 4.5 stars out of 5 on Capterra.
It has 4375 reviews on Capterra.
“Overall I am very happy with FreshBooks. Invoices are quickly generated and paid, and hourly tracking has gone from a burden to an easy process directly integrated into our day to day tasks.”
Click here to read the full review.
3. Quickbooks Payroll
QuickBooks is accounting software developed by Intuit, designed for small and medium-sized businesses to manage their finances, track expenses, and generate reports.
It provides a range of features to streamline accounting tasks and improve financial management.
Key Features,
- Invoicing
- Expense Tracking
- Financial Reporting
- Bank Reconciliation
- Tax Calculation and Filing
- Payroll Management
- Inventory Tracking
- Bill Payment
- Time Tracking
- Mobile Access
Quickbooks has a rating of 4.3 stars out of 5 on Capterra.
It has 6438 reviews on Capterra.
“As I already said, I love the direct access to my numbers and the added reporting that has allowed me to better run my company by quickly getting insights I need. It’s a lot easier for customers to pay online and I’m finding more and more of the moving that direction vs. sending in checks, so it’s good that we are set up in this way now.”
Click here to read the full reviews.
4. Gusto
Gusto is a cloud-based platform that offers a variety of HR and payroll services for small and medium-sized businesses.
It aims to simplify and automate HR tasks, allowing businesses to focus on their core operations.
It can handle all aspects of payroll, including calculating employee wages, withholding taxes, and generating pay stubs.
Key Features,
- Employee Onboarding
- Payroll Processing
- Benefits Administration
- Time Tracking
- Compliance Assistance
- Employee Self-Service
- Reporting and Analytics
- Integrations with other HR tools
- Tax Compliance
- Mobile App Access
Gusto has a rating of 4.7 stars out of 5 on Capterra.
It has 3849 reviews on Capterra.
“Useful tool and the management quality is productive and i like the management of payment operations and collaboration through different projects.”
Click here to read the full review.
5. Rippling
Rippling is an integrated platform that combines HR and IT management, aiming to simplify and automate various aspects of employee management.
The platform offers a wide range of features to help businesses manage their workforce more effectively.
It provides tools to streamline the onboarding process, including collecting new hire information, setting up accounts, and assigning tasks to ensure a smooth transition for new employees.
Key Features,
- Employee Onboarding
- Payroll Processing
- Benefits Administration
- Time Tracking
- Compliance Assistance
- Employee Self-Service
- IT Management
- Security and Access Control
- Reporting and Analytics
- Integrations with other HR and IT tools
Rippling has a rating of 4.9 stars out of 5 on Capterra.
It has 3034 reviews on Capterra.
“I use Rippling to monitor all my payroll from my company. I am able to carry my payroll on the go and I use it to present as proof whenever I wish to travel. Navigating around the app is very simple and easy.”
Click here to read the full review.
6. Paycor
Paycor is a comprehensive HR and payroll software solution that helps businesses manage their workforce more efficiently.
The platform offers a wide range of features to streamline HR processes and improve employee management.
It allows businesses to automate payroll calculations, tax withholdings, and direct deposits, saving time and reducing the risk of errors.
Key Features,
- Payroll Processing
- Tax Filing and Compliance
- Employee Self-Service
- Time and Attendance Tracking
- Benefits Administration
- Reporting and Analytics
- Applicant Tracking System (ATS)
- Onboarding and Offboarding
- Performance Management
- HR Compliance Tools
Paycor has a rating of 4.4 stars out of 5 on Capterra.
It has 2754 reviews on Capterra.
“The Paycor platform is intuitive and straightforward. You can set up your dashboard the way you like it so that you always have quick access to the information you use most.”
Click here to read the full reviews.
7. BambooHR
BambooHR is a human resources software that focuses on providing small and medium-sized businesses with the tools they need to manage their HR processes effectively.
This database can store personal details, contact information, employment history, and performance evaluations, making it easy for HR professionals to access and manage employee records.
Key Features,
- Employee Database
- Applicant Tracking System (ATS)
- Onboarding and Offboarding
- Time and Attendance Tracking
- Performance Management
- Employee Self-Service
- Reporting and Analytics
- Benefits Administration
- Document Management
- Mobile App Access
BambooHR has a rating of 4.6 stars out of 5 on Capterra.
It has 2734 reviews on Capterra.
“Excellent project data management and the Applicant tracking functionalities and easy reporting across several projects the tool is fantastic.”
Click here to read the full review.
Can Payroll Software Handle Tax Calculations Automatically?
Yes, payroll software can handle tax calculations automatically, including key elements like Medicare, which is a federal health insurance program primarily for individuals aged 65 and older, as well as for some younger people with disabilities.
The software can also manage various filing statuses, such as single, married filing jointly, or head of household, which affect tax rates and withholding amounts.
Social Security is another crucial aspect addressed by payroll software, ensuring accurate deductions for this federal program that provides retirement, disability, and survivor benefits. Social Security tax is a payroll tax that funds the Social Security program, and payroll software calculates and withholds this tax accordingly.
Form W-4, issued by the IRS, is used by employees to indicate their withholding preferences, such as claiming allowances for dependents or specifying additional withholding amounts. Withholding allowances are allowances claimed on the W-4 form that impact the amount of taxes withheld from an employee’s paycheck.
IRS regulations dictate tax deductions, which payroll software calculates based on factors like employee earnings, deductions, and credits.
Bi-weekly pay frequency refers to paying employees every two weeks, and payroll software adjusts calculations accordingly to ensure accurate withholdings and deductions over the pay period.
The software handles dependents, individuals whom an employee financially supports, influencing tax credits and deductions.
Federal Insurance Contributions Act (FICA) includes Social Security and Medicare taxes, which the software computes based on employee earnings and IRS guidelines.
Income tax withholding is the amount withheld from an employee’s wages to cover income taxes, and payroll software accurately calculates this based on Form W-4 information and tax brackets.
Pay frequency refers to how often employees are paid, affecting tax withholding calculations.
Medicare tax is a payroll tax withheld from employee wages to help fund the Medicare program, and payroll software ensures correct withholding and reporting.
Post-tax deductions are deductions taken from an employee’s paycheck after taxes are withheld, such as contributions to retirement plans.
Tax credits are incentives that reduce the amount of tax owed, and payroll software applies these credits as applicable.
Additional withholding allows employees to request extra tax withholding from their paychecks, which the software accommodates.
Employee’s paychecks are generated by the software, incorporating pay rates, pre-tax deductions (like retirement contributions), and post-tax deductions (such as health insurance premiums). Payroll software handles tasks like running payroll, ensuring accurate calculations and timely payments.
Unemployment taxes are taxes paid by employers to fund unemployment benefits, and the software manages these contributions, including state unemployment taxes. Further, Wage base refers to the maximum amount of earnings subject to a particular tax, such as Social Security tax, and payroll software considers this limit in its calculations.
Providers of payroll systems like Buddy Punch offer solutions for managing tax contributions, ensuring compliance with IRS regulations and accurate tax returns.
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Other Types of Pay That Can Effect Payroll Calculations
Following are the types of pay that can effect payroll.
1. Vacation Pay
Employees who take vacation time are still entitled to their regular pay.
It’s essential to ensure that vacation pay is included in the employee’s compensation and taxed accordingly.
2. Sick Leave
Employees who take sick leave are entitled to receive their regular pay for the time off.
It’s essential to include sick leave pay in employees’ total compensation and apply the appropriate taxes.
3. Tips and Gratuities
Tips and gratuities are additional forms of income that can significantly affect payroll calculations, especially in service industries where employees often receive tips as compensation.
While tips are typically given directly to employees by customers, they are taxable income and must be reported to the employer.
4. Bonuses
Bonuses are a form of additional compensation that can significantly impact payroll calculations.
They are typically awarded to employees for exceptional performance, achieving specific targets, or other notable achievements.
5. Commission
Commission is a form of compensation that directly links an employee’s earnings to their performance, particularly in sales or other metric-driven roles.
It is usually calculated as a percentage of the sales revenue generated by the employee.
6. Benefits
Benefits are a significant component of employee compensation, often impacting payroll calculations.
These non-monetary perks can include health insurance, retirement contributions, and fringe benefits like gym memberships or child care assistance.
7. Loans and Advances
Loans and advances provided to employees can impact payroll calculations, particularly regarding deductions.
When an employer advances an amount to an employee, it is typically deducted from their future paychecks.
What is the Importance of Accurate Payroll Calculations?
Accurate payroll calculations are vital for several reasons.
Employee Trust and Satisfaction: Accurate payroll ensures that employees are paid correctly and on time, which helps build employee trust and satisfaction.
Legal Compliance: Payroll calculations must comply with various labor laws, including minimum wage laws, overtime pay, and tax regulations.
Cost Savings: Accurate payroll helps avoid overpaying or underpaying employees, which can save money in the long run.
Financial Reporting: Accurate payroll data is essential for financial reporting and budgeting. It provides insights into labor costs and helps in making informed business decisions.
Employee Benefits: Payroll calculations often include deductions for employee benefits such as health insurance, retirement plans, and other perks.
Tax Compliance: Payroll calculations must accurately withhold and pay taxes to the relevant tax authorities. Inaccuracies can result in fines and penalties.
Business Reputation: Payroll errors can damage a company’s reputation. Employees consistently paid incorrectly are likely to have negative perceptions of their employer.
What Are Some Of The Best Free Payroll Software Options For Small Businesses?
When considering payroll software options for small businesses, it’s essential to find a solution that fits your needs without breaking the bank.
Fortunately, several options offer good features at almost no cost.
1. Payroll4Free
As the name suggests, Payroll4Free provides essential payroll services without any charge. Small business owners can efficiently manage pay employees, automation, garnishments, PTO, local taxes, and payroll reports through this platform.
It’s an excellent startup solution for businesses looking to streamline their payroll processes without incurring monthly fees.
2. OnPay
OnPay stands out for its user-friendly interface and comprehensive features. Beyond handling pay employees and payroll reports, OnPay also integrates seamlessly with windows and offers accruals tracking for employee time off.
Its all-in-one solution includes HR features like workflows and an employee portal, making it an attractive option for small business owners looking for efficiency and convenience.
3. ADP
While ADP is known for its full-service payroll solutions, it also offers a startup-friendly add-on specifically tailored for small businesses. With ADP, small business owners can manage payroll, federal tax obligations, and even paper checks for up to three months without incurring monthly fees.
Additionally, ADP’s platform supports bank account integration for seamless transactions.
4. Paychex
Paychex caters to small business payroll needs with its affordable monthly fee structure. With Paychex, small business owners gain access to a range of payroll features, including time clock integration and payroll reports.
Its user-friendly interface simplifies the payroll process, making it an ideal choice for those new to payroll management.
5. Patriot
Patriot offers a free payroll solution for small businesses, making it an attractive option for startups and small business owners.
Beyond handling pay employees and federal tax obligations, Patriot also supports local tax calculations and offers a variety of payroll features such as employee time tracking and garnishments management.
When choosing the best free payroll software for your small business, consider factors like the number of employees, your payroll features needs, and the software’s compatibility with your existing workflows.
By selecting the right solution, you can streamline your payroll processes and focus on growing your business.
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Frequently Asked Questions (FAQs)
What is a paycheck calculator and how does it work?
A paycheck calculator is a handy tool that helps individuals estimate their net pay after deductions like employment taxes, child support, and wage garnishments.
It factors in variables such as employee works hours, overtime rate, and semi-monthly pay frequency, guiding users step-by-step to determine their take-home pay accurately.
What are FICA taxes and how are they calculated?
FICA taxes, comprising Social Security and Medicare contributions, are calculated based on an employee’s gross pay.
These taxes fund social security benefits and healthcare for retirees and the disabled, with rates set annually by the IRS.
What is a payroll system and why is it important for businesses?
A payroll system automates the process of paying employees, crucial for businesses to manage salaries, deductions like federal unemployment tax, and ensure compliance with regulations.
It streamlines tasks like calculating wages, generating payslips, and handling tax filings, improving efficiency and accuracy in payroll management.
What are the key differences between ADP and Paychex payroll services?
ADP and Paychex differ in various aspects, including service offerings, pricing structures, and customer support. While both provide comprehensive payroll solutions, ADP is known for its robust HR features, while Paychex offers customizable packages tailored to different business sizes.
Customers often evaluate these distinctions to choose the best-fit payroll service for their needs.
Conclusion,
In conclusion, calculating payroll involves several vital steps to ensure accuracy and regulation compliance.
It starts with gathering employee information, calculating gross wages, deducting taxes and contributions, and calculating net pay.
By following these simple steps and leveraging the right tools, businesses can effectively manage their payroll processes, ensuring employees are paid accurately and on time while staying compliant with legal requirements.
