- 1). Calculate time cards to determine hours worked. If you have a computerized timekeeping system, which imports the time into payroll software, the system tallies the hours for you. If you have a manual payroll system, calculate the hours by hand. Regular hours are those worked up to the 40 for the workweek. Overtime hours are those exceeding 40 under federal law. Review your state labor department's overtime laws, which may equal or differ from federal law.
- 2). Pay the employee for breaks and subtract lunchtime. Breaks can last between five and 20 minutes long; lunch lasts 30 minutes or more. If the employee works while on lunch, pay her for the lunchtime.
- 3). Pay regular and overtime hours. Compensate regular hours at the worker's regular pay rate. Pay overtime at 1 and 1/2 times his regular pay rate. His total regular and overtime wages equal his total gross wages.
- 4). Determine salary. A salaried employee's pay remains constant each pay date unless she has a pay or deduction adjustment. To determine gross salary per period, divide the employee's number of annual pay periods--such as 24 semimonthly pay periods--by her annual salary.
- 5). Figure federal payroll taxes. Obtain the employee's filing status and allowances from lines 3 and 5 of his W-4 form and use IRS Circular E's withholding tax tables to figure federal income tax withholding. Compute Medicare tax at 1.45 percent of all gross income and Social Security tax at 6.2 percent, up to the yearly wage limit of $106,800.
- 6). Calculate state payroll taxes. Most states require employers to withhold state income tax; a few require city and local income tax withholding. Apply your state revenue agency's guidelines to determine the various withholding amount. North Carolina Department of Revenue, for example, requires employers to use the employee's NC-4 form and the state withholding tax tables to figure state income tax.
- 7). Subtract the employee's payroll taxes (as shown in Steps 5 and 6) from his gross wages (as shown in Step 3 or 4).
- 8). Deduct voluntary deductions from the result of Step 7 to arrive at the employee's take-home pay.
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