How to Calculate Payroll
Payroll calculation involves more than just multiplying hours by a rate. Each paycheck requires calculating gross pay, employee withholding, employer taxes, and net pay. Here is the complete process.
Step 1 — Calculate Gross Pay
Gross pay is total earnings before any deductions.
Hourly: Gross Pay = (Regular Hours × Rate) + (OT Hours × Rate × 1.5)
Salary: Gross Pay = Annual Salary ÷ Pay Periods per Year
Use the Overtime Pay Calculator to calculate gross pay with overtime automatically.
Step 2 — Subtract Pre-Tax Deductions
Some employee deductions reduce taxable wages before calculating withholding. Common pre-tax deductions include traditional 401(k) contributions, HSA/FSA contributions, and employer health insurance premiums. Subtract these from gross pay to get taxable wages.
Step 3 — Calculate Employee Tax Withholding
Step 4 — Subtract Post-Tax Deductions
Post-tax deductions (Roth 401(k), wage garnishments, voluntary deductions not qualifying as pre-tax) are subtracted after taxes are calculated.
Step 5 — Calculate Employer Taxes (Separate from Employee Pay)
These are costs the employer pays in addition to gross wages — they are not deducted from employee pay.
| Tax | Rate | Applies To |
|---|---|---|
| FICA (employer match) | 7.65% | All wages (SS cap applies to 6.2%) |
| FUTA | 0.6% | First $7,000 per employee/year |
| SUTA | Varies | State wage base; varies by state & rate |
Use the Labor Burden Calculator to estimate your total employer cost per employee.
Worked Example
Hourly employee: $20/hr, 45 hours worked, bi-weekly pay period, single filer, no pre-tax deductions:
| Regular pay (40h × $20) | $800.00 |
| Overtime pay (5h × $30) | $150.00 |
| Gross Pay | $950.00 |
| Federal income tax withheld | −$82.00 |
| Social Security (6.2%) | −$58.90 |
| Medicare (1.45%) | −$13.78 |
| State income tax (est.) | −$33.00 |
| Net Pay | $762.32 |
Illustrative only. Federal and state tax withholding depends on W-4, state, filing status.
Frequently Asked Questions
How often must payroll taxes be deposited?
Deposit frequency depends on your total tax liability. Most small employers are monthly depositors; larger payrolls use the semi-weekly schedule. The IRS assigns your schedule annually based on prior year lookback period.
What records must employers keep?
Keep payroll records for at least 4 years, including employee information, hours worked, wages paid, W-4 forms, and tax deposit records.
Last reviewed: August 2026
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