How do I calculate my employees’ paychecks?
Paying your team is like throwing a party — but with math. No need to freak out. Follow these eight steps to figure out how to calculate your employees’ take home pay:
- Tally your employee's gross wages from their employment agreement or time sheet. Gross wages include tips, commission, and overtime (if it applies to them).
- Figure out the amount of taxable wages. Pre-tax deductions, such as some retirement contributions and health insurance premiums, are subtracted before taxes come into play.
- Check your employee’s W-4 form for their filing status and withholding allowances. For example, someone can file as a married couple and take three allowances.
- Now, determine the amount of Federal income tax to withhold by using the IRS Publication 15 (Circular E). Choose either the percentage method or the wage bracket method and use the appropriate chart to help walk you through it.
- Calculate your employee’s contributions to Social Security taxes. This rate is currently 6.2% of taxable wages. Once your employee has reached a cumulative gross pay of $127,200 (for 2017), no extra Social Security tax is withheld.
- Calculate your employee’s contributions to Medicare tax. This rate is currently 1.45% of taxable wages. After your teammate reaches a cumulative gross pay of $200,000, they’ll be subject to additional Medicare withholding at a 0.9% rate.
- Phew, you’re almost there. Now, calculate the state and local tax for each employee. Some states (such as Alaska, New Jersey, and Pennsylvania) have an employee-share of unemployment taxes, and most states have income tax as well. Ohio and Pennsylvania are hotspots for local taxes, but be sure to check the regulations where you live to see what is due. If your employees are in a bunch of different states, you’ll need to figure out each individually according to the state where they live and the state where they perform their work. Use this directory of state government websites to give you a head start.
- This is the step you’ve been waiting for. It’s finally time to figure out their net pay, which is the amount that will show up on their paychecks.
(Gross payroll) - (taxes) - (benefits/deductions) + (reimbursements) = Net pay
Jot down the formula above, and you’ll be ready to calculate your team’s paychecks wherever, whenever.