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The Complete Payroll Blog

Simple guide: Calculating payroll costs for your employees

Posted by CJ Maurer | May 10, 2016 11:27:06 AM

Simple guide: Calculating payroll costs for your employees

You wouldn’t buy a new front door for your house without first measuring the size of the door frame to make sure it fits. Similarly, most accountants and bookkeepers would encourage you to calculate the annualized costs of paying each employee (and making sure you can afford them) before extending them a formal offer.

Fortunately, the process is pretty simple.

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Calculating payroll for hourly employees

For hourly employees, the first thing you need to do is collect time records. Some companies use time sheets while others rely on time clocks to produce the time records required to submit payroll.

Usually, whoever supervises the hourly employee reviews the time records for each pay period and submits them to the bookkeeper or payroll processing company.

Once you have the time records in hand, then you can calculate payroll. For example, if a nonexempt employee works a standard 40-hour week, you would calculate gross pay like this...

40 hours worked x $14 per hour = $560

Let’s say that same employee worked 45 hours the following week. In that instance, you would calculate gross pay like this…

40 hours worked x $14 per hour = $560

5 overtime hours x $14 per hour x 1.5 overtime pay rate = $105

$560 regular pay + $105 overtime pay = $665 regular pay

If the employee isn’t exempt from the Fair Labor Standards Act (FLSA), overtime must be paid for any hours worked over 40 during a standard, seven-day work week.

Calculating payroll for salaried employees

Of course, you also need to calculate payroll for salaried employees. But this is even simpler. For a salaried employee, all you need to know is their base salary and the amount of pay periods in a year.

If an employee has a base salary of $40,000 and gets paid twice monthly, their calculation would look like this.

$42,000 ÷ 24 pay periods = $1,750 gross pay per pay period

Remember: Many companies pay their employees biweekly, which is not the same as twice monthly. If you pay your employees biweekly, you’re actually paying them 26 times a year (52 weeks ÷ 2 = 26 pay periods).

Therefore, an employee with the same salary that’s paid biweekly would actually look like this…

$42,000 ÷ 26 pay periods = $1,615.38 gross pay per pay period

Employment taxes

You didn’t think you were finished, did you?

After hourly wages, salaries and/or bonuses are paid, you still owe taxes for each employee. They are as follows…

Social Security/FICA - Currently 6.2% on the first $90,000 of salary

Unemployment/FUTA - Currently 6.2% on $7,500 of salary

Medicare - Currently 1.45% with no salary cap

Workman’s compensation - Varies depending on the category of your employee, with clerical at about 0.3% of salary and manufacturing at about 7.5% of salary

Benefits

Basic salary and employment taxes are a minimum. Benefits are offered at the discretion of the employer, but in most cases you’ll need to offer at least some benefits to attract and retain quality employees.

A typical benefit package for a $50,000 salaried employee include life insurance, health insurance and some dental coverage. Other benefits may include long-term disability insurance, dependent care assistance, tuition reimbursement and retirement plans (IRA, 401-K, etc.).

Putting it all together

With a robust benefits package, the total employee cost is somewhere between 25-40% of an employee’s salary. That would mean an employee with a $50,000 salary would actually cost the business somewhere between $62,500 and $70,000 to employ. 

For more information, or to ask a question, get in touch with us. We’d love to help you out!

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Written by CJ Maurer

Professional communicator and connector. Fan of exercise, Indian food and the New York Mets.

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