How is salary and wages calculated?
How you calculate salary and wages depends on how you pay your employees.
If you pay your employees a salary, you can calculate the monthly pay by dividing their gross annual salary by twelve.
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 week, then you can calculate weekly pay by dividing by 52.
For example, if the 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 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. 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 local, state, and federal income tax, unless paying contractors. (If you pay a contractor, they are responsible for calculating their own taxes). You will also need to deduct social security from the employee’s gross wages, and any other applicable taxes that apply in your state or region.
How do you calculate salaries and wages payable?
You calculate salaries and wages payable differently.
Calculating salaries is simple. Most employers set an annual rate (because the numbers are bigger and, therefore, more attractive when trying to recruit) and then divide it by the number of pay periods (either monthly, weekly, or biweekly) in a contract of employment. For instance, an employer might advertise a digital marketing job paying $45,000 per year, or $3,750 per month.
Calculating hourly wages payable is a little more complicated. Most firms do it by multiplying the number of hours the employee works by the hourly rate, ensuring that they comply with the Fair Labor Standards Act.
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.
How do you calculate wages?
You can calculate wages in a variety of different ways, depending on your business’s pay structure and employee benefits.
To calculate an employee’s gross wages, simply multiply to the total number of hours worked for the pay period by the hourly rate. If you pay the federal minimum wage rate, you’ll need to multiply the hours worked by $7.25.
To calculate net wages, you’ll need to estimate the annual gross pay and benefits for the employee and then deduct taxes.
To estimate annual pay, multiply monthly pay by 12 to get gross pay. Then withhold all applicable taxes and deduct any post-tax contributions to benefits. If required, garnish wages (for instance, if the employee has to pay bankruptcy fees or child support), and then pay the net income.
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.
Is salary calculated for 30 days or 31 days?
You can calculate salary for 30 or 31 days, but most companies do it by “calendar month,” meaning that 28-, 30-, and 31-day months all pay the same.
For instance, a firm might offer an employee a gross salary of $55,000 per year which breaks down to $4,583 per month, regardless of how many days are in the month. In this case, the employee would receive an identical paycheck on the 25th of each month.
Many firms that don’t have salaried employees get around this problem by defining the week as the pay period. Weeks continue ticking over at the same rate, regardless of the number of days in the month.
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.
What is the formula of wages?
The basic formula for wages is as follows:
Gross Wages = Number of hours worked in the pay period x hourly wage rate + fixed tips, bonuses, and commissions for the pay period
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.