How to calculate payroll is the next step of how to do payroll. This is where you actually see how to pay your employees.
If you didn’t start at the beginning of the payroll discussion, check out these pages:
This is a simplified example of small business payroll, for learning purposes, but you will easily learn from this example how the process of calculating payroll is done.
We’ve gone over all the taxes, and the difference between hourly and salary wages, gross pay and net pay. Let’s calculate a sample payroll.
Let’s say we’ve started a vending business, and we’ve hired two kids to fill the machines, Ricky and Dave.
What do we do first?
The first step in how to calculate payroll is gathering the necessary information.
- We have them fill out an Employment Application Form. This will tell us their full names, birth dates, home address, work history, if any, and someone to call in case of emergency. (also make sure if they are minors they have the right paperwork to be able to work)
- We need to have them fill out a Federal Form W-4, and a similar state form, which tells us how to calculate the amount to withhold when we file taxes. Also find out what locality they live in. Is it a city or a township, for example, then find out if there is a local tax.
- Have them fill out a Form I-9, from the Department of Immigration. This tells us they are legally allowed to work in the U.S.
Revisit our page on employer payroll taxes if you need a refresher.
Okay. So we have all the necessary forms, and information we need to calculate payroll on these two.
The next step in how to calculate payroll is to decide how much and and how often to pay them.
Be aware of the Federal and State Minimum Wage, and make sure you pay them at least the minimum required. Go to the website for your state or the Department of Labor to find the latest.
Let’s pay them $8.50 per hour, and let’s pay them bi-weekly. That’s every two weeks.
We could pay them weekly, biweekly, semi-monthly (twice a month for example), or monthly.
Let’s say each boy worked 6 hours each week filling our vending machines. And we’re paying them every 2 weeks.
To calculate Gross Wages for each boy we calculate it by multiplying the hours by the hourly wage. In this case that’s $8 x 12 hours.
The next step in calculating payroll is employee payroll taxes.
So what taxes do we need to withhold from each boy’s wage?
- Social Security Tax of 6.2%
- Medicare Tax of 1.45%
- Federal Withholding Tax – use the Federal Withholding Tables
- State Withholding Tax – use State Withholding Tables
- Local Withholding Tax – calculate based on percentage for that locality.
For the withholding tables, go online at IRS.gov and your state website and search for ‘tax tables’.
For this example, let’s say we’re operating in Toledo, Ohio. The local tax for Toledo, Ohio is 2.25% of gross wages.
To look up Federal Withholding in the federal tax tables, we need to know the gross wage, whether the employee is single or married, and the number of exemptions claimed. We also need to know the frequency of payment.
We’re paying them biweekly. And we know the gross wages from the calculation above, and we can find the other two tidbits on the employee’s Form W-4 that we had them fill out.
Both boys are single, and are claiming “0” exemptions.
So, look at the Federal Withholding Table for Single – Biweekly. Go down the column on the left, and look for the wage spread that includes $96, then slide over to the column that shows “0” exemptions. This is your federal withholding for that pay.
Then look at the Ohio Withholding Tax Table for “bi-weekly”. Find the wage spread down the right, then slide over to find “0” exemptions. That is your Ohio withholding tax for that pay.
Notice that the Net Pay is the Gross Wages less all the payroll taxes.
We would now write the boys checks for $85.86 each.
That’s how you calculate payroll.
However, that’s not the end of the process. You then have to remit the taxes that you’ve withheld to the proper authorities. You send the Social Security and Medicare tax x 2 (1 for the employee and 1 for the employer), along with the Federal Withholding taxes to the IRS, and you send the state and local withholding taxes to your state tax department, and you local tax office. You do this on a monthly or quarterly basis, depending on the size of your payroll. The taxing authorities will tell you which category you fall in.
If this all sounds a bit too much for you, send me an email. I provide payroll services as well as accounting services.