How are salary and wages calculated?

Being accurate when it comes to yearly salary and wages is critical for any business owner to learn. Whether you’re great with numbers or would rather avoid them, the process of figuring out take-home pay isn’t nearly as intimidating as it may seem at first.

In this post, we’re going to break down how to calculate salary and wages for your employees, common pitfalls with the process, and how to make managing annual income easier on yourself and your human resources team. By the end of this article, you should be able to guarantee accuracy of employee salaries and wages (and maybe streamline the process for yourself as well).

Note: If what you’re looking for is a quick and easy way to calculate employee wages, you really can’t go wrong with an all-in-one employee management tool like Buddy Punch. In addition to employee time tracking and scheduling features, Buddy Punch has a built-in Payroll function that makes it easy for you to automate accurate payment for your employees. There’s a reason why over 10,000 businesses have made the switch to using Buddy Punch to handle all things employee management. Click here to learn more, or click here to start a 14-day free trial.

For example, if an employee’s gross annual pay (before tax) is $24,000, then their monthly salary is $2,000.

If the pay period is one workweek, then you can calculate weekly salary by dividing by 52.

If an employee’s gross wages are $104,000, you can divide by 52 to get weekly pay of $2,000.

Calculating pay for employees on an hourly wage works differently. Here, you add up the number of hours worked during the pay period multiplied by the hourly pay rate to arrive at a gross weekly pay figure.

For instance, suppose you have an employee on federal minimum wage working forty work hours per week. Their gross pay for the week will be $7.25 (the current minimum wage) multiplied by 40, which is $290.

You may also need to calculate overtime pay for your nonexempt employees (exempt employees are not eligible for overtime). To do this, add the number of hours worked overtime multiplied by the overtime rate to the number of hours worked at the basic rate, multiplied by the basic rate.

For example, you might have an employee earning $10 per hour at the basic rate on a standard forty-hour contract doing 10 hours of overtime at $20 per hour. Their total weekly wage is then $10 x 40 + $20 x 10 = $600.

When calculating net wages, you will need to deduct payroll taxes such as state income tax, federal income tax, and local taxes, unless paying contractors. If you pay an independent contractor, they are responsible for calculating their own taxes.

You will also need to figure out other payroll deductions such as social security from the employee’s gross wages, and any other applicable taxes that apply in your state or region.

Considering all these calculations to be made and deductions to keep in mind, it’s no surprise that even small businesses are willing to pay a premium for payroll software that makes it easier to manage their cash flow. That said, we’ve made sure we kept Buddy Punch affordable for our subscribers, even as we added simple to use features to help them automate payroll. Click here to read more about Buddy Punch’s payroll options.

Usually, paid time attracts the same rate of pay regardless of when the employee works. However, rates may differ depending on the time of day or type of work performed.

For instance, base pay in a superstore might be $15 per hour, 9 am until 5 pm, Monday to Friday, but $25 per hour, after 5 pm, or on Saturday and Sunday. Therefore, an employee working 30 hours at base pay and then 20 hours at the weekend would earn 30 x $15 + 20 x $20= $950.

Wages may also include bonuses, tips, or commissions.

To calculate bonuses for salaried employees, simply add the bonus to their base pay, either quarterly or at the end of the year. For commission, add fixed commission payments to their monthly or semi-monthly salary.

Most tipped employees are hourly wage earners (such as waitstaff or drivers). How you calculate their gross pay depends on your company policy. If you ascribe tips individually, then you will need to add any amount to your employee’s gross wages. If you keep all tips, you don’t need to consider them when you calculate gross wages.

Accrual Accounting Specifics

If your business is choosing to use accrual accounting over cash accounting, you’ll have to be careful about the difference between salaries payable and salaries expense.

Salaries payable is the record of unpaid salary expenses to be paid to your employees. It’s the gross pay an employee would receive if you didn’t have to pay salary expenses at the end of the month. Salary payable must subtract various employee-related debits, such as basic salaries, overtime, and other allowances. Accounting managers and professionals often record this and accrued salaries on the balance sheet under current liabilities (in a liability account).

Salaries expense (or wages expense) is the fixed pay earned by your employees during a set period of time. This is not based on hours worked, making it a non-hourly earning. This is instead a fixed recurring expense.

Some employers go as far as to hire CPAs to make sure they’re getting all their accrued expenses correct on their general ledger. It could also be worth using a payroll software with automatic features for correcting and adjusting entries and ensuring accuracy for your payroll expenses.

For instance, suppose you pay an employee weekly for forty hours of work paid at $10. Their gross pay is $400 per week but they will have to pay federal income tax of $15.10, and Social Security Tax of $24.80. You may also have to withhold state unemployment insurance contributions and Medicare taxes, depending on where you operate. Therefore, an employee earning $400 per week in gross wages will receive closer to $350 in net wages.

Hourly and salaried employees need to report taxable income to the Internal Revenue Service on an annual basis. Therefore, firms calculate gross annual wages first and then make deductions to arrive at a net pay figure (to ensure that the employee meets their tax obligations).

To calculate net wages, firms first calculate gross wages for the year (taxable income) and then deduct all applicable taxes to yield net income. They then divide the net income by 12 to yield monthly net pay, which is what employees see on their pay stubs.

For example, hourly employees might get paid minimum wages of $7.25 as casual laborers on a construction site, working 40 hours per week. Total weekly gross pay, therefore, is 40 multiplied by $7.25.

The gross pay calculation for commission-earning salespeople is different. For instance, a car dealership might pay a basic rate of $10 per hour, plus a commission of $250 per vehicle sold by the salesperson. If a salesperson works 45 hours per week and sells 5 cars, their gross weekly pay is $10 x 45 + (5 x $250) = $1,700.

When calculating employee compensation, employers need to be mindful of minimum wage laws operating in their region. While federal law sets the minimum wage at $7.25 per hour, states may have different minimum wage rules. For instance, in Wisconsin, a tipped employee’s hourly wage can be as low as $2.13 per hour. By contrast, New York sets a flat minimum rate of $15 per hour for all employees.

Calculating gross wages is a little more challenging if employees work fluctuating hours. In these cases, employers should estimate gross wages based on estimated hours worked to arrive at an annual salary figure. They can then estimate an average weekly or monthly pay packet, deducting estimated earnings. If the employee pays more than they owe, then they are liable to a refund from the IRS the following tax year.

The formula for calculating net wages is as follows:

Net wages = Gross wages – pre-tax deduction and non-taxable benefits – taxes – after-tax deductions

Gross wages are given by the formula above. Pre-tax deductions include things like health insurance, dental insurance, child care expenses, health savings account contributions, and disability allowances. Pre-tax deductions reduce employees’ taxable income.

Taxes include social security and Medicare, which comprise 15.3 percent of the employee’s gross pay, half paid by the employer, and half by the employee. Employees must also pay federal, state, and local income taxes, with some states demanding that employers contribute to their workers’ federal income tax burdens.

After-tax deductions include things like union dues, wage garnishments, transportation programs, Roth 401(k) contributions, and flexible spending accounts.

Net wages imply lower hourly wages than gross wages. Therefore, you may wish to quote gross employee wages when advertising certain job positions.

Calculating net wages is significantly more complicated and challenging than gross wages, particularly if hourly employees work overtime hours. Because of this, most firms hire professional accountants, either as contractors or in-house.

In some cases, you may want to withhold extra taxes, particularly if you believe that an employee’s earnings will rise throughout the current tax year. This way, you can help them avoid unexpected bills at the end of the pay period.

Make Calculating Salary and Wages Easier with Payroll Software

As should be clear by now, there are a lot of calculations to make when figuring out salaries and wages, and you have to multiply each of these calculations by the number of employees you have on your payroll. The need for accuracy and the desire for efficiency often result in business owners using payroll software.

These are considerations we kept in mind when we added built-in payroll options to our software, Buddy Punch. With features like automated payroll payments, integrated timesheets, employee self-onboarding, and more, you’ll be able to streamline your payments and leave the math to salary calculators.

Try Buddy Punch Free

If you’ve decided that a payroll software would make it easy for you to calculate wages and salary, you can sign up for a 14-day free trial of Buddy Punch here. You can also book a one-on-one demo, or view a pre-recorded demo video to see Buddy Punch’s other employee management features (such as time tracking and employee scheduling).

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