How to calculate payroll: formulas and examples

Here is how to calculate payroll in one line: gross pay, minus pre-tax deductions, minus taxes withheld, minus post-tax deductions, equals net pay. Then the employer adds its own payroll taxes on top. The arithmetic is easy. The order of the steps, and which wages each tax uses, is where owners slip.

Below you’ll find every line with 2026 rates and four worked examples. For the wider process, from setup to filing, see our guide on how to run payroll for a small business.

The gross-to-net payroll formula

Every paycheck follows the same five-part formula. You figure gross pay, take out pre-tax items, then taxes, then after-tax items, and land on net pay. Each tax has its own wage base, so one paycheck can carry two or three different taxable wage numbers.

The trap sits in line 2. A traditional 401(k) deferral lowers income tax wages. However, the IRS says deferrals stay “wages subject to withholding for Social Security and Medicare taxes.” They count for federal unemployment tax too.

2026 payroll constants to keep on hand

These are the federal tax rates and limits that drive 2026 payroll. Each one comes from the IRS, the SSA, or the DOL, checked October 28, 2026. State rates vary, so add your own state income tax and unemployment rows.

For 2027, the Social Security wage base rises to $192,300. Our roundup of 2026 payroll tax changes covers the tips and overtime income tax deductions.

How to calculate payroll in eight steps

The eight steps below run in the same order for all employees in every pay period. First, you build gross pay from hours worked. Next, you work through deductions and payroll taxes. Finally, you add the employer’s share, so nothing gets taxed on the wrong wage number.

Step 1: Collect hours, rates, and forms

Gather approved hours, pay rates, deduction elections, and a current Form W-4. With no W-4 on file, treat the employee as Single or Married Filing Separately with no other entries. A short timesheet approval workflow catches missed punches before they reach a paycheck.

Step 2: Calculate gross pay

For hourly employees, gross pay is regular hours times the hourly rate. Then add overtime hours times 1.5 times the regular rate. For salaried employees, divide the annual salary by pay periods per year: 52 weekly, 26 biweekly, 24 semi-monthly, or 12 monthly.

Overtime counts by workweek, not by pay period, so check each week of a biweekly run separately. The overtime rules for small employers explain which pay goes into the regular rate.

Step 3: Subtract pre-tax deductions in the right order

Pre-tax deductions do not all get the same tax treatment. A traditional 401(k) deferral cuts income tax wages only. An HSA contribution through a section 125 cafeteria plan is generally not wages at all, so it cuts every line. That leaves two wage numbers to track:

• FICA wages equal gross pay minus HSA salary reductions under a Section 125 plan. Other cafeteria plan items can differ, so check the plan.
• Income tax wages equal FICA wages minus 401(k) deferrals.

Step 4: Withhold Social Security and Medicare

Multiply FICA wages by 6.2% for Social Security and 1.45% for Medicare. Stop the Social Security line once year-to-date wages reach $184,500. Start the extra 0.9% Medicare tax in the pay period when year-to-date wages pass $200,000.

You match the 7.65% dollar for dollar, but the 0.9% has no employer share. For more detail, see our walkthrough on calculating payroll taxes by hand.

Step 5: Figure federal income tax withholding

Federal withholding comes from the W-4 and the IRS Publication 15-T percentage method. For a 2020 or later W-4, Worksheet 1A runs in four moves:

1. Multiply income tax wages by pay periods per year. Add W-4 Step 4(a). Then subtract Step 4(b) and the standard amount ($12,900 married filing jointly, $8,600 otherwise, zero if the Step 2 box is checked).
2. Find the result in the Annual Percentage Method table. Take the base amount plus the bracket rate on the excess. Then divide by pay periods.
3. Subtract the Step 3 credits divided by pay periods. Do not go below zero.
4. Add any extra withholding from W-4 Step 4(c).

The examples below use these 2026 married filing jointly rows from the standard table:

Step 6: Withhold state and local income taxes

Use your state revenue agency’s current withholding tables, and check for local wage taxes.

Step 7: Subtract post-tax deductions to get net pay

Garnishments, union dues, and Roth 401(k) deferrals come out after every tax line. Whatever remains is net pay. Our guide to reading a pay stub explains what each stub line means.

Step 8: Add the employer’s share and keep the records

You owe the 7.65% FICA match, FUTA, and state unemployment tax on top of gross pay. After that, you deposit the taxes, file the returns, and keep the records.

Example 1: hourly employee with overtime

This illustrative example shows a weekly paycheck with overtime at an 18-person HVAC crew. The technician files married filing jointly with no other W-4 entries. He earns $24 an hour, worked 46 hours, defers 5% to a traditional 401(k), and has a $15 after-tax deduction.

How the federal line works

Income tax wages are $1,176 minus the $58.80 deferral, or $1,117.20. Times 52 weeks, that is $58,094.40. Minus $12,900, it is $45,194.40, which lands in the $44,100 row.

The math is $2,480 plus 12% of $1,094.40, or $2,611.33 a year. Divided by 52, that gives $50.22. State tax is left out because it depends on the state.

Example 2: salaried employee and the exempt test

A salaried paycheck starts with division, but a salary alone does not make someone exempt from overtime. This illustrative example uses a 9-person dental office. The office manager earns $52,000 a year, paid biweekly, and files married filing jointly with no other W-4 entries.

Each check is $2,000. She puts $50 into an HSA through a Section 125 plan and defers $80 to a traditional 401(k).

Does a salary mean no overtime?

No. Under federal rules, exempt employees generally must earn at least $684 per week and pass a duties test. The office manager earns $1,000 a week, so she clears the salary floor, but her duties still decide it.

A salaried coordinator at $30,000 a year earns about $576.92 a week, below $684, so you owe overtime for hours over 40. I’ve seen owners give a salaried title to every office role, then owe back overtime after a claim.

Example 3: two pay rates in one week

When one employee works two jobs at two rates in the same week, overtime uses a blended rate. Under 29 CFR 778.115, the regular rate is the weighted average: straight-time pay from both jobs divided by total hours. This illustrative example uses a 22-person landscaping crew.

A crew member works 30 hours mowing at $20 and 15 hours running equipment at $26, for 45 hours in total.

1. Straight-time pay: (30 x $20) + (15 x $26) = $990.
2. Regular rate: $990 / 45 hours = $22.00.
3. Overtime premium: 5 hours x ($22.00 x 0.5) = $55.00.
4. Gross pay: $990 + $55 = $1,045.

Why you only add a half-time premium

Straight-time pay already covers all 45 hours, so you add only the extra half. Using the $20 mowing rate instead gives a $50 premium, and the worker comes up $5 short.

In the accounts I’ve worked on, this is the overtime error that lasts longest, because the check still looks close. Narrow alternatives exist under 29 CFR 778.400 and 778.415 to 778.421, so check them before you change your method.

Example 4: a bonus check with the flat and aggregate methods

A bonus paid on its own check counts as supplemental wages. You can withhold a flat 22% if the bonus is paid or listed separately. You must also have withheld income tax from that employee’s regular wages this year or last. Otherwise, use the aggregate method.

In this illustrative example, the office manager from Example 2 gets a $1,000 bonus on a separate check, with no 401(k) deferral.

How the aggregate method works

Add the bonus to the employee’s regular wages for the current or most recent payroll period: $1,870 plus $1,000 equals $2,870. Figure withholding on that total as one regular paycheck, which Worksheet 1A puts at $176.71. Then subtract the $63.15 already withheld, which leaves $113.56 for the bonus.

Neither method changes her final tax bill. It only changes how much comes out now, and she settles the rest on her return. Our post on discretionary and non-discretionary bonuses explains when a bonus also changes the overtime rate.

What payroll costs the employer on top of wages

On top of gross wages, the employer generally pays 7.65% for Social Security and Medicare. It also pays FUTA, usually 0.6% on the first $7,000 per employee. Then comes state unemployment tax at the rate your state assigns.

Using Example 1, the technician’s $1,176 week adds these costs:

• The FICA match is $72.91 plus $17.05, or $89.96.
• FUTA is $1,176 x 0.6%, or $7.06, until his wages for the year pass $7,000.
• SUTA is $1,176 times your state rate, up to the state wage base.
• In total, that week costs $1,273.02 before state unemployment tax.

The FUTA credit catch

FUTA tops out at $42 per employee per year. However, the full 5.4% credit depends on paying your state unemployment taxes, and employers in credit reduction states get less.

Payroll formulas for Excel or Google Sheets

A spreadsheet works for small businesses with a handful of employees if the formulas are right. One bug to avoid is a net pay formula typed with an en dash, which a spreadsheet will not read as minus. Every formula below uses a plain hyphen.

Use one employee per row. B holds weekly hours, C the hourly rate, F the 401(k) percentage, and G the section 125 amount. J holds federal income tax from Worksheet 1A and K holds post-tax deductions. Add a state tax column and subtract it in O2.

Mistakes to check before you approve a pay run

When hand-calculated payroll goes wrong, the cause is usually the order of steps or the wrong wage base, not bad arithmetic. Run this checklist before you release a single paycheck, because these errors later turn into back pay.

1. Did 401(k) deferrals come out of income tax wages only?
2. Did you count overtime by each workweek?
3. Does each worker with two rates have a blended regular rate?
4. Is every exempt salaried worker at $684 a week or more?
5. Has anyone passed $184,500 or $200,000 year-to-date?
6. Did FUTA stop at $7,000 per employee?
7. Is there a current W-4 for each new hire and each change?

My advice is to save one worked line per pay run that shows the math for one employee. If totals look off later, that line shows where the formula broke.

How long to keep payroll records

The Internal Revenue Service tells employers to keep all employment tax records for at least 4 years. Federal wage law sets a 3-year minimum for payroll records and 2 years for timecards, rate tables, and work schedules.

So treat 4 years as your floor for registers, W-4s, deposits, and returns, per IRS Publication 15. Some states require longer. Our payroll record-keeping rules list what to keep and for how long.

How FRIDAY handles the math each pay run

FRIDAY runs the gross-to-net math from approved time, so you can calculate payroll without a worksheet. Hours come in from the clock-in kiosk, with facial recognition and PIN sign-in, or from the GPS-geofenced mobile app. Payroll then figures taxes, deductions, and net pay in that order.

The Startup plan is $59 a month plus $12 per user, with unlimited payrolls, tax filing, direct deposit, and W-2s and 1099s. Once hours are approved, you get payroll in seconds. You can try it free for 14 days, with no contract or setup fee.

FAQs

How do you calculate payroll for hourly employees?

Multiply regular hours by the hourly rate, then add 1.5 times the regular rate for each hour over 40 in a workweek. Subtract deductions and taxes from that gross pay to reach net pay.

How much tax is taken out of a $300 paycheck?

Social Security and Medicare take $22.95 from a $300 paycheck, which is $18.60 plus $4.35. Federal income tax depends on the employee’s W-4. In an illustrative weekly case, a married filing jointly employee with no other W-4 entries has $0 federal withholding.

How much do employers pay in payroll taxes on top of wages?

Employers generally pay 7.65% of wages for Social Security and Medicare, with Social Security capped at $184,500 in 2026. They also pay FUTA, usually 0.6% on the first $7,000 per employee, plus state unemployment tax.

How do you convert biweekly pay to monthly pay?

Multiply the biweekly paycheck by 26, then divide by 12. A $2,000 biweekly check equals $52,000 a year, or about $4,333.33 a month. For weekly pay, multiply by 52 and divide by 12.

What is the percentage method for federal income tax withholding?

The percentage method is the IRS Publication 15-T withholding calculation. It annualizes wages, subtracts a standard amount and applies bracket rates. You then divide by pay periods and adjust for W-4 entries.

Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Consult a licensed professional for guidance specific to your situation.

Pincus Schiff

Pincus Schiff is a payroll software specialist at Friday App, where he helps businesses simplify payroll, stay compliant, and automate their workflows. He writes about payroll best practices, compliance, and the latest in workforce technology.