Manual Payroll Calculations: Do You Know Your Payroll Math?

As an employer, you have a responsibility to ensure your staff is paid for their work. You also have to ensure your employee payroll meets all the requirements for proper calculations including accurate deductions, appropriate payment for hours worked and other considerations such as voluntary deductions when applicable. That’s a lot of information to keep track of using a manual payroll process. Here’s everything you need to know for your payroll calculations.

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Hourly Workers

Hopefully, you have an efficient process to capture hourly workers’ time. Automated time clocks are the best way to ensure you are accurately recording the number of hours worked each week for each hourly worker’s schedule. Your manual payroll calculations are based on the pay frequency and their hourly wage. So, for someone who is full time making $11 an hour on a biweekly pay schedule, the calculation would look like this: 40 hours x 2 weeks = 80 hours x $11/hour = $880 (gross regular pay).

Overtime for Hourly Workers

If overtime is included in manual payroll calculations, it is paid at 1.5 times the worker’s regular pay rate. In this case, the calculation would look like this: 80 hours at the regular pay rate as shown above plus the overtime calculation: 10 hours x 2 weeks = 20 hours x $16.50 ($11 x 1.5) = $330 (gross).

Salaried Workers

Salaried employees are paid the same amount for each pay period. Most salaried workers do not qualify for overtime, making it easier to calculate for your manual payroll. Check with your state to find out if overtime is due to your salaried employees. Salaried workers have an annual salary that is divided by the number of pay periods in your year. So, someone making $80,000 per year on a semi-monthly pay schedule would be calculated as $80,000 / 24 semimonthly pay periods = $3,333.33 (semi-monthly salary).

Statutory Deductions versus Voluntary Deductions

There are both statutory and voluntary deductions included in manual payroll calculations:

Statutory Deductions

Statutory deductions include all deductions required by law:

Federal Income Taxes

Federal income taxes are calculated using the current Internal Revenue Service’s Circular E (Employer’s Tax Guide) and the employee’s W-4 form for the federal income tax amount.

Every year, the IRS releases a new Publication 15-T with instructions on how to calculate federal tax. Factors that influence federal income tax include:

• pay frequency
• filing status (eg. single, married)
• number of jobs the employee has
• pre-tax deductions
• annual withholdings
• number of dependents
• whether the employee W4 was filed before or after 2020
  (Prior to 2020, employees would claim allowances on their W4’s. After 2020, the IRS simplified the process by allowing employees get “credits” for children and dependents)

FICA Tax

This is federal payroll tax paid by the employee and employer that contributes to medicare and social security.

Medicare Tax

Medicare tax is calculated at 1.45% of all gross earnings.

Social Security Tax

Social Security tax is calculated at 6.2% of gross earnings up to the yearly wage limit.

FUTA Tax

FUTA is the Federal Unemployment Tax Act which supplies benefits for unemployment. Only the employer pays FUTA tax, however only the first $7,000 of an employee’s salary is subject to this tax at a rate of 6%. So if an employee earns $70,000 per year, $7,000 will be taxed and the employer will contribute $420.

State Income Taxes

State taxes are calculated using the employee’s state income tax form and the state withholding tax tables. These amounts vary by state.

Other Statutory Deductions

Other statutory deductions, which do not apply to all employees, could include child support or wage garnishments.

Voluntary Deductions

Voluntary deductions will vary based on the employee and your company. Some examples of voluntary deductions would include benefits, insurance, retirement contributions or parking fees. Calculations would be based on the agreed-upon amounts for these deductions.

Deduction Deposits

All statutory tax deductions are deposited directly to the government agency accounts. Benefit deductions are remitted to benefits administrators separately.

There can be special circumstances that affect the deposit process. This might include child support deductions or wage garnishment payments. The parties in question will inform you when such deductions are required with instructions on how payment is submitted to the agency involved.

Employee Payment

The last step of employee payroll is to deliver payment to your employees. This can be done electronically via direct deposit or using a paper check. Accuracy is very important for payroll as it can cause administrative issues that put the additional workload on your HR/payroll team. It also causes frustration and mistrust for employees.

For direct deposit, you will require banking information from your employees. The pay is then made through your payroll processor/bank with payment going directly into the employee’s bank account.

Paperless Payroll

As you can see manual payroll calculations are quite labor-intensive. To reduce time and risk for error, you can simplify the process by switching to a paperless payroll. The benefits of going paperless include:

• Electronic quarterly payroll tax returns.
• Quick access to real-time payroll data for proper payroll processing.
• Employees have self-service option to manage payment preferences and view pay statements.
• Customizable security levels to protect data.
• Custom reporting capabilities.
• Complete integration with benefits administration and other voluntary deductions.

The math involved in manual payroll calculations is extremely time-intensive. It requires constant attention and also increases the risk for errors and late payments to government agencies. Adopting a paperless payroll process will make payroll easier, freeing up time and providing self-service options for employees when they need information. 

About The Author

Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.