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How to Calculate Paycheck and Payroll for Your Employees

The employer has the responsibility of precisely calculating paycheck and payroll for their company’s staff. Errors can happen if incorrect amounts are deducted for Medicare, Social Security, or taxes, which can be quite demotivating for employees. Miscalculations can make the firm face a review and potentially incur penalties from government bodies like the IRS (Internal Revenue Service). Therefore, it’s important to pay attention and carefully perform payroll processing to avoid any mistakes.

Filling out Forms

Start by getting your personnel to complete state and federal staff withholding forms. While beginning a new position at a company, the employee needs to complete the W-4 form or federal Employee Withholding Allowance Certificate. This state form’s structure and name differ in each state.

The info given in the W-4 form enables an organization to know the amount of state and federal income tax to deduct from each staff member’s pay based on the number of exemptions they claim and filing status. The more the number of exemptions, the less pay is withheld from the employee’s paycheck. But the employee may still owe money for tax payments. If the state does not levy any income tax, then there will be no state withholding form for your employees.

Get the Forms Signed

You should verify that all your employees sign the state and federal documents to make them valid.

Double-Check the Information on the Forms

Scrutinize the info on the employee forms to ensure your staff members have correctly added the figures and that they are accurate.

Computing Net Pay

First, calculate each staff member’s gross pay. You can do this by multiplying their number of worked hours by their rate per hour. For instance, if a staff member works 40 hours a week and their pay rate is $20 per hour, then, their weekly gross pay adds up to $800.

You should then include any bonuses, commissions, or overtime given for the payment period. Pay periods could be monthly, bi-weekly, or weekly. If it is bi-weekly, then a full-time staff member needs to be paid for 80 hours worked. If the employee is given a fixed wage, then they’ll be paid the same sum regardless of their number of worked hours.

Get State and Federal Income Tax Tables

The federal tables list the federal income tax owed by an employee based on filing status, exemptions, and pay. The IRS publishes the latest tax tables on its website. You can find the state tables on the website of the state comptroller.

Apply State and Federal Income Taxes

You can use the tax tables to correctly calculate the amount of state and federal income taxes to deduct. Withhold the federal taxes based on each employee’s claimed exemptions, filing status, and pay. Then, subtract this amount from the total gross pay. To deduct state taxes, get information from the state revenue department’s web portal on the sum to withhold.

Deduct Social Security Tax

It’s simple to compute the Social Security tax amount as it is a determined percentage of a staff member’s gross pay. Further, employers also need to pay Social Security taxes. Currently, the Social Security tax rate is 6.2% for an employee.

Subtract Medicare Taxes

Similar to the Social Security tax, you need to deduct Medicare taxes which are also a determined percentage of an individual’s income. Employees also need to pay their share of Medicare taxes. The current Medicare tax rate is 1.45% for each employee.

Withhold Other Deductions

You should also subtract each employee’s mandatory deductions and voluntary contributions from their gross salary. Voluntary contributions could be flexible spending accounts, long-term disability, deferred compensation plans, and 401(k) contributions. Mandatory withholdings include alimony and child support.

Determine the Net Salary

The net salary is the remaining amount after the subtraction of these deductions. Check your calculations one more time to ensure there are no errors and that your computations are accurate.


A quality payroll software solution can help to make your payroll processing faster, simpler, and more precise. You can perform payroll processing either in-house in your company or outsource it to a third-party provider. Each has its pros and cons, so evaluate your needs and select the best option for your business.

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