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How to calculate payroll
Payroll

How to calculate payroll

If you’re a small business owner with employees, running payroll is an essential step in your operations. In this article we are going to explore how to calculate payroll.

Step 1. Calculate your employee’s gross pay

You can determine an employee’s gross pay using their pay rate and your scheduled pay periods. Most businesses will pay employees on a schedule. Most commonly, pay periods are weekly, fortnightly, or monthly.

Hourly

To calculate an hourly employee’s gross pay, multiply their hours worked in the pay period by their hourly pay rate. The formula follows:

Hourly rate x total hours worked in the pay period = gross pay

Let’s look at an example. Say an employee makes $15 an hour. Their employer pays them every two weeks. The employee worked 35 hours the first week and 30 hours the second week for a total of 65 hours for the pay period. So the employee’s gross pay is $975.

Salaried

To calculate a salaried employee’s gross pay, divide their annual salary by the number of pay periods in the year. The formula follows:

Yearly salary/number of pay periods in year = gross pay

Let’s look at an example. An employee makes $60,000 a year. Their company pays employees every two weeks for a total of 26 pay periods. So the employee’s gross pay is $2,307.69.

Step 2. Make pre-tax deductions

After determining gross pay, you’ll need to factor out deductions. These are tax deductions, but other pre-tax deductions may also apply. Some common pre-tax deductions include:

  • Salary sacrifice superannuation
  • Workplace giving
  • Other salary sacrifice pre-tax deductions

Step 3. Deduct taxes

Once you make pre-tax deductions, the remaining pay is taxed. To calculate PAYG withholding tax you can use the ATO tax calculators. You will report the amount withheld on the monthly, quarterly or annual activity statement. 

Deduct the calculated amount from the employee’s gross pay. After that comes superannuation and deductions.

The business submits both the employee’s and the company’s superannuation contributions to the superannuation funds within the timeframes dictated by the ATO or the relevant award under which the employee is paid. Whilst the ATO has minimum quarterly contribution requirements, the award may stipulate monthly contributions.

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Step 4. Make voluntary deductions

Once you make an employee’s pre-tax and tax deductions, the next step is to make any other post-tax deductions from the remaining wages. These may include:

  • Employee post-tax superannuation contributions
  • Some health insurance plans
  • Wage garnishments
  • Union dues

Step 5. Determine the employee’s net pay

After all taxes and deductions, the remaining amount is the employee’s net pay. Net pay is how much the employee will take home on payday.

To get the most out of your payroll software, choose a system like QuickBooks Payroll with features that can support:

  • Payments and Deductions including the Medicare levy, superannuation, student loans and statutory payments.
  • Superannuation schemes and managing contributions including Salary Sacrifice superannuation
  • Several pay run payment options such as weekly or monthly
  • Error corrections
  • Offering worry-free payroll processing, time-saving automation, and many other advantages, QuickBooks Payroll provides the support you need, all year-round. For tips on setting up QuickBooks Payroll, head to the Payroll Resource Hub for articles and guides to help you get started.

Offering worry-free payroll processing, time-saving automation, and many other advantages, QuickBooks Payroll provides the support you need, all year-round. For tips on setting up QuickBooks Payroll, head to the Payroll Resource Hub for articles and guides to help you get started.

Disclaimer: Intuit does not provide professional advice. We may provide you with information that may be of use to you, however this is not to be considered as a substitute for getting your own professional advice. Intuit is not liable to you for your use or reliance on the information provided by it.


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