The term "pay calculation" refers to the method used to determine the gross to net income of an employee. Pay calculation helps differentiate between the costs of gross and net income. There are various pay components that need to be considered when it comes to “pay calculation.”
What are the Components of Pay Calculation?
The main components for Pay Calculation are gross income and net income.
1. Gross Income
The sum of money an employee makes on a daily, weekly, monthly, or annual basis is their gross income. In gross income, no deductions of taxes occur, and it also includes any overtime, bonuses, awards, or reimbursements.
Gross income can be easily calculated, even if it’s for hourly pay, fixed salary, or overtime pay.
(a) Hourly Pay Calculation
To calculate hourly pay, you need to multiply the total working hours of the employee by the fixed hourly wage.
For example, if an employee works 40 hours a week and earns $15 per hour, then their gross income would be:
Weekly Gross Income = 40 Hours X $15 = $600
(b) Overtime Hourly Pay Calculation
In most of the states in the U.S., the overtime pay of an employee is 1.5 times their regular wage. So, to calculate the gross income with overtime pay, do the previous calculation for Hourly Gross Income. Then, if an employee has worked 9 hours overtime a week with a $15 wage per hour:
If an employee is paid a fixed salary at the end of each week, then you can easily calculate the fixed salary gross income by dividing the total pay period by the annual pay. Suppose an employee earns $38,500 per year over 52 pay periods, then:
$38,500 yearly salary / 52 total pay period = $740.39 Weekly Gross Income
2. Net Income
After deducting taxes and other expenses, the amount that an employee is paid is their Net Income. It is the term used to describe the in-hand pay that has been determined after income tax, state tax, medicare, and other deductions have been eliminated.
Usually, the formula for Net Income is straightforward and as follows:
Gross Income + Bonuses - Tax - Company Deductions - Other Deductions = Net Income
(Note: There are many other deductions except the mentioned ones above, so it is better to check with your company and applicable legal regulations)
How to Perform Pay Calculation of an Employee?
Pay calculation is simple, and the only necessary data are the gross and net income. Nowadays, these calculations can be done automatically through different pay calculators. However, the difference between the two shows the pay difference of an employee.
For example, if an employee earns $53,545 annual gross pay and the net pay is $51,234 after deductions of different state, federal, and local taxes and other deductions, then the pay calculation would be:
$53,545 - $51,234 = $2,311 Pay Difference
Now, the employee and the company know a total of $2,311 has been deducted in a year out from the employee’s initial paycheck, and that can be used to calculate the gross-to-net pay ratio over time.