A manual payroll system is performed entirely by hand; an in-house computerized system includes an on-site payroll staff and the use of payroll software; an external system involves outsourcing your payroll tasks to a payroll company. The objective of the payroll system is to ensure that employees are paid accurately and on time. To meet this goal, some general tasks apply.
Items you will need
- IRS Circular E
- Time sheets/cards
Figure hourly workers’ pay. Pay hourly workers according to what their time sheet/card reflects. This includes regular time, overtime and benefit days, such as vacation and personal time.
Pay regular hours (those under 40 for the workweek) and benefit days at the employee’s regular pay rate. Pay overtime hours (those above 40 for the workweek) at his overtime rate of 1½ times his normal pay rate. The hourly employee must actually work 40 hours for the week to qualify for overtime pay. Therefore, if he works 35 regular hours and takes 8 vacation hours, pay all 43 hours at his regular pay rate.
For instance, say the employee earns $9/hour. His time sheet for Monday to Friday shows in at 7:30 a.m. and out at 5:30 p.m. He takes an hour of unpaid lunch each day, which leaves nine work hours for each day, a total of 45 hours for the week.
Regular calculation: 40 hours x $9 = $360, weekly gross regular pay. Overtime calculation: 5 hours x $13.50 ($9 x 1.5) = $67.50, weekly gross overtime pay.
Calculate salaried employees’ pay. Pay salaried workers a set pay each pay period. For instance, if the salaried worker earns $53,000 annually and gets paid biweekly, the calculation would be as follows:
Calculation: $53,000 / 26 biweekly pay periods = $2,038.46, biweekly pay.
If you must prorate the salaried worker’s pay, such as if she terminated in the middle of pay period, do so based on her hourly or daily rate.
Hourly rate calculation: $53,000 / 2,080 (yearly work hours, including benefits) = $25.48. Daily rate calculation: $53,000 / 26 biweekly pay periods / 10 days = $203.84, daily rate.
Subtract statutory/involuntary deductions and voluntary deductions from the employees’ gross pay to arrive at the net pay. Use the IRS withholding tax tables (Circular E; see Resources) and employees’ Form W-4 for the appropriate tax year to determine the federal income tax. The Circular E also lists the most current Social Security and Medicare tax rates. Use the state tax withholding tables and the employee’s state income tax form to determine state income tax, if applicable. If your state does not charge state income tax, do not withhold it from the employee’s paycheck.
Voluntary deductions include medical, dental, life and disability insurance; retirement contributions; and parking fees.
Process your payroll based on your pay frequency. For instance, process a weekly payroll based on one week’s pay and a biweekly payroll based on two weeks’ pay.
Payroll software performs wage and deduction calculations, which simplifies payroll processing.
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