Whereas payroll software calculates paychecks based on inputted data, manual payroll requires that you perform all calculations by hand. The latter is OK if you don’t have many employees and understand payroll processing. If not, the process may be time-consuming and prone to errors. When calculating payroll by hand, apply a meticulous approach and applicable federal, state and local laws.

Calculate time for hourly employees based on their time card data. Round down minutes from one to seven and round up minutes from eight to 14 to the nearest quarter hour. For example, round down 8:02 a.m. to 8 a.m., and round up 4:09 p.m. to 4:15 p.m.

Determine regular and applicable overtime wages for nonexempt employees; these are usually hourly workers. Under federal law, overtime is work hours of more than 40 for the week. Overtime does not include vacation, sick or personal hours taken during the week. Multiply regular hours by the regular pay rate to get regular wages. Multiply the regular rate by 1.5 to arrive at the overtime rate. Multiply overtime hours by the overtime pay rate to get overtime wages.

Compensate nonexempt employees no less than the required federal or state minimum wage, whichever is more. Consult your state labor department for overtime laws that might differ from federal law.

Calculate salary by dividing the annual salary by the number of pay periods in the year. For example, an annual salary of $40,000 divided by 24 semi-monthly payrolls equals $1,666.67. Different federal and state minimum wage requirements apply to exempt employees, so contact the federal or state labor department for clarification. Exempt workers are usually salaried employees who you don’t have to pay overtime.

Include additional compensation in gross wages or salary, if applicable. This may include bonuses, commissions, vacation, personal or sick pay or retroactive pay for wage increases. These types of earnings, and overtime wages, are called supplemental wages, which can be paid with the employee’s regular check or as a separate check.

Subtract nontaxable earnings and pretax deductions from gross pay to arrive at taxable gross wages. Nontaxable earnings include mileage and other qualified expense reimbursements. Pretax deductions include qualified 401(k) contributions and retirement and health benefits.

Withhold federal income tax from taxable wages. Apply the Internal Revenue Service Circular E tax table that goes with the employee’s wages, pay period and filing status and allowances on her W-4 form.

Withhold Medicare tax at 1.45 percent of all taxable wages, and Social Security tax at 4.2 percent of taxable wages up to $110,100 for the year, as of 2012. The Circular E has these rates, which are subject to annual change.

Deduct state and local taxes based on your state and local government’s withholding criteria. These requirements vary, so contact the state revenue agency for clarification.

Figure after-tax deductions, such as wage garnishment, Roth 401(k) and health insurance that doesn’t qualify as pretax. The remainder is the employee’s take-home pay.


If supplemental wages are paid as a separate check, the IRS and the state and local governments have their own taxation rules. Also, the state and local governments may have their own tax calculation rules for pretax deductions. To help ensure accuracy, triple-check the payroll before you write paychecks.