How to Calculate Employees Payroll Checks

One of the less-than-rewarding tasks for the self-employed is the weekly or bi-weekly chore of computing payroll checks. While today’s accounting systems make this once tedious and time consuming puzzle tremendously less painful, if you have a large company with a transient worker population, you still may want to consider using a payroll service and spend your time on more revenue generating fronts. It isn’t that the weekly chore is so difficult; it’s that the end-of-year mess requires you looking back to all your employees, even if they only graced you with their presence for a day or two. If you forgo the service and decide to go it alone, you will be plugging numbers into your accounting program and working, end-of-year, from computer-generated numbers.

Things You'll Need

• W-4 Forms
• Circular E from IRS
• State/Local withholding charts
• Written authorization for voluntary Deductions/reductions
• Calculator

Instructions

Calculating Payroll Checks

1. Have your employees fill out a W-4 Form. This is required by law and it must include their correct and verifiable name, address and social security number. They also need to indicate their marital status and their selected personal exemptions. The form must be dated and signed by the employee and kept on file by the employer.

2. Calculate your employee’s gross wages. If your hire is a salaried employee, use his weekly salary as his gross pay and begin the deductions from that point. If he is paid hourly, multiply the hours worked by his hourly wage. The resulting sum is his gross pay.

3. Deduct voluntary payroll reductions. These amounts are subtracted from and reduce gross pay, thus rendering them non-taxable. Federal Income Tax is based on gross pay amount after these reductions are taken. Among allowable non-taxable reductions are contributions to retirement accounts. Any of these reduced amounts must have written authorization from the employee.

4. Deduct statutory payroll taxes from gross wages. These taxes include: Federal income tax. This amount can be obtained from the IRS Publication 15 (Circular E) tax tables and is based on an employee’s filing status and number of claimed deductions. State Income Tax. This percentage rate will vary from state to state. Some states have no income tax; some tax only on certain kinds of income. Local Income Tax. Again, whether or not your employee is subject to this tax is determined by geographical location. For example, a single worker in New York City, earning $25,000 would be charged $736 in addition to other mandadorty taxes. FICA/OASDI. This amount is 6.2% of gross income for the first $102,000 (2008). After that cap is met, no further deduction occurs. FICA Medicare. This amount is 1.45% of gross income.

5. Deduct voluntary deductions. These deductions reduce net pay, but do not reduce gross pay and may include contributions to savings plans, tuition payments, direct deposits. Again, it is necessary to have written authorization from the employee to make these deductions from his paycheck.

6. Subtract all of the previous amounts to arrive at net pay.

Resources

• Read this Article in Spanish