- January 3, 2024
- Posted by: Mohammed Abiola
- Category: Uncategorized
It’s the right of every employee to get paid for their labor at the end of a payroll cycle. However, paying employees can be a daunting task as it involves making specific calculations to ensure employees are paid correctly and on time. To calculate payroll, you need to evaluate the time spent on work, deduct taxes and statutory taxes, and determine net pay.
This article will guide you on how to make accurate payroll calculations to prevent errors and pay delays.
Steps in calculating payroll
Employers can utilize different methods to compute their payroll, however, the steps remain the same. Below, we break down the steps to help you calculate your payroll more efficiently. Let’s dive in.
Determine the hours worked for
Typically, you start your payroll calculations by assessing the hours each employee spent on work. This is a very basic and important step you can miss or skip because doing that will amount to overpaying or underpaying your employees. You can achieve this by keeping a daily time record of your employees’ work hours, i.e., what time they resume and stop work per day. Collect these timesheets either manually or electronically and calculate the number of hours worked and overtime, as the case may be, for each payroll cycle (which can be weekly, biweekly, or monthly).
Compute gross pay for hourly workers
You may decide to pay your employees on an hourly basis. For example, you may pay your employees $10 per hour on a monthly payroll cycle and their timesheets show 45 hours total work time. To determine the gross pay, you do this by calculating the total number of hours per month and multiplying this with the hourly pay.
Manual calculation: 45 hours x 4 weeks = 180 hours
180 hours x $10 = $1,800 (gross pay).
Calculate gross pay for salaried workers
On the other end of the pay spectrum, salaried workers are paid based on a fixed wage, and the pay remains the same each pay period (either monthly or biweekly). To calculate their gross pay, you need to divide the annual pay by the total pay periods per year (i.e., 12 months).
For instance, if the annual pay of your manager is $100,000 on a monthly pay cycle,
Gross pay = $100,000/12 months = $8,333.
Determine statutory deductions and taxes
Next, you have to ascertain the tax and statutory deductions for each of your employees. Statutory deductions involve all deductions as stipulated by the law. Moreover, employers are also required by law to remit payroll taxes on behalf of their employees. Payroll taxes are remitted to the state board where the organization is found. So check your state board to know how to carry out the tax remittance and the requirements. Payroll taxes are dependent on the gross pay; this means that as the gross pay increases, the amount you are to pay in taxes increases proportionally.
Statutory deductions include the national housing fund (2.5% of gross pay), the retirement fund (8% of gross income), health insurance (10% of gross income), and the social insurance fund (1% of gross pay). To determine the total deductions, add up the individual statutory deductions and the personal income taxes.
Make provisions for expense reimbursement
Employees may incur expenses on behalf of the business or organization using their money. It’s necessary to reimburse them by adding it up to their net pay. However, you don’t have to deduct tax from it since it’s the personal money of your employee, not an income that is earned.
Determine the net pay
After making the necessary calculations in the above steps, the next step is to put them all together and calculate the net pay of each of your employees. To work this out, you need to add up the statutory deductions and taxes and subtract them from the gross pay.
Net pay = gross pay – (statutory deductions + personal income tax)
After concluding on the net pay, the last step is issuing paychecks. Before distributing paychecks, you should ensure the payroll calculations are accurate to prevent employees’ distrust and dissatisfaction. You can pay your employees through physical cash or electronically through a bank transfer. In the case of a bank transfer, you will need to gather your employee’s banking details and automate the transfer process through an app or via the bank.
Options for calculating payroll
You can make use of different platforms to get your payroll calculations done; however, you have to take note that some are more efficient than others.
In manual processing, you use a pen and paper to get the work done. This is the most antiquated model of calculating payroll. It generally involves computing your payroll on a sheet of paper. Not only is this mode of calculating payroll challenging, but it’s also capable of introducing errors that you can miss if not properly reviewed. If you are planning on using this method, ensure you are well conversant with payroll calculations and pay good attention to details.
Another method of calculating your payroll is using a spreadsheet such as Excel or Google Sheets. This method is more efficient than the paper and pen method. The major downside of it is that you must have technical skills in the use of spreadsheets. You can delegate this role to a payroll administrator or your accountant if you lack the technical skills to ensure the accuracy of your payroll calculations.
The last option you can fall back on is payroll software. There are numerous software to enable your payroll calculations in the market. To get the best software that fits your needs, you have to be intentional about it. You should choose based on your pre-set budget, company size, and key features you need. Most software is subscription-based, which means going this route can be expensive. Also, you need to have adequate knowledge of how to use it to your advantage. But all in all, it can simplify your entire payroll process.
How can we help?
Payroll calculations can be a hassle for most business owners, especially those with insufficient know-how of how they’re done. PoweredUp Consulting can help take away the burden of computing payroll, relieve you of the stress of doing it by yourself, or reduce the workload on your admins. We utilize the best software to achieve this, and we ensure high standards and accuracy by utilizing the best practices while maintaining compliance with local laws. To find out more, you can book a consultation with us.