How to Calculate Payroll Hours

One of the big questions when working with hourly employees is how to calculate time for payroll.

Most payroll systems work with specific time intervals, like 15 or 30 minutes, and can’t account for shorter time periods. On top of that, tracked hours typically are recorded as hours and minutes.

To accurately create your payroll, you need to do some math to convert between the two and calculate the total time worked.

Keeping an accurate record of employee hours is essential for every business. You need to be precise, as potential mistakes can become serious problems and even lead to lawsuits. At the same time, you want to prevent your employees from committing time theft and protect your company.

Here are the steps to calculate payroll hours correctly:

• Step 1: Set up a time tracking system for your team for accurate payroll calculation.

• Step 2: Apply the correct method for converting minutes to decimal hours for payroll purposes.

• Step 3: Multiply the hours worked by the respective wage rate and subtract taxes and deductions to get to the final payout amount.

There are many methods for calculating timesheet hours, but they all start with employees logging their time on tasks and projects. Their logged hours can be either dedicated to a specific project or can count for the total hours that a team member has spent working for a particular company within a period.

You can track time by filling out paper timesheets, punching time cards, or using timesheet software. Today, most companies use digital platforms to track hours.

Time clock apps have several benefits over old-school time cards, two of the most significant being improved accuracy and ease of use. Employees can manually enter the employee hours in a timesheet at the end of each day or use a time tracking app to track time on the go.

If your system is analog, you can use free timesheet templates and a time card calculator to save time and improve the accuracy of your calculations.

You have to decide how to add up hours for payroll, and there are two primary ways to go about doing that:

1. Actual time calculation

Use the time an employee has recorded (e.g., if they noted 5 hours and 13 minutes, use this number for their payroll). You can calculate based on the hours worked but must ensure that your time tracking solution allows it.

This is how the calculation works:

• First, you must add the whole hours, which means 5 days multiplied by 8 hours, up to 

40 hours per week.

• Then, you have to add the minutes. In this case, 13+7+4+9+2 = 35 minutes

• The total hours for the week are 40 hours and 35 minutes. This addition is correct, but you cannot use it for payroll calculation, as the time is not in decimal format.

2. Rounded time calculation 

Now that you've totaled the hours, it's time to round to the nearest hour (also called timesheet rounding). Before you start, make sure to subtract any unpaid breaks and lunchtime. 

While the practice of timesheet rounding is legal under federal law in the U.S., you must follow strict rules regarding how you apply it in your payroll calculations. 

Here are the rules to follow:

• Time entries must be rounded to the nearest 15-minute interval only.

• You can use the following minutes after an hour:

:00, :15, :30 and :45.

• If an employee clocks in or out at a time that doesn't match the 15-minute intervals, round to the nearest one, either up or down.

• Use the 7-minute rule when rounding:

• Round down if a logged time is within 1 to 7 minutes before the nearest 15-minute mark.

• You have to round up if the time is more than 7 minutes.

Examples of rounded time calculations:

• The logged time is 9:07 am. You have to round down to 9:00 am.

• The logged time is 9:08 am. In this case, you have to round up to 9:15 am.

After rounding up or down, you subtract the clock-in time from the clock-out time to obtain the number of hours and minutes that an employee worked during a specific day.

Let's say the person clocked in at 9:08 AM, rounded to 9:15 AM, and clocked out at 5:28 PM, rounded to 5:30 PM.

Follow these steps to get the payroll calculation right:

• First, convert all hours to 24-hour format, so 5:30 PM becomes 17:30.

• Then you subtract 9:15 from 17:30, and the result is 8:15.

• This means that the employee worked 8 hours and 15 minutes. 

• Convert the time into a decimal format before you use it for payroll calculation.

You can also use other rounding options, such as 5-minute or 6-minute. In both cases, the rounding should be up or down, depending on whether the logged time hits the half-interval mark.

The guiding principle for your rounding system is that it should never harm the interests of your employees. Failing to protect their right to fair payment can result in wage theft accusations and trials. 

You can set up rounding only in your employees' favor, but you cannot always round time legally in your interest. A tried-and-true way you can opt for is to round the clock-in time in favor of the employee and the clock-out time in your favor.

Whichever method you choose (actual or rounded hours), remember that if an employee has worked more than 40 hours per week, you are legally responsible for overtime pay. It's typically 1.5 times the regular wage rate per hour. There may be other cases where you use the overtime rate, such as weekend working hours or other special occasions.

The next issue you need to tackle is calculating payroll hours and minutes. Whether you’ve used actual or rounded timesheet hours, you will end up with the logged time in the hours and minutes format.

However, if you calculate this time with the wage rate, you will not get the correct final payroll cost. You must convert the minutes into decimals or parts of one hour since the wage rate is formulated per hour.

To convert minutes into decimal values, you have to divide the minutes logged by 60 minutes.

Here’s an example. If an employee has logged 8 hours and 20 minutes, you need to divide 20 minutes by 60. The result is 0.33. So the time in decimal format is 8.33 employee hours. You can use this number in the next step, where you multiply by the wage rate.

Credit: Patriot Software

When you have the timesheet hours for a specific employee and convert the time in decimal format, you can move to calculate payroll hours. It entails multiplying the wage rate by the hours worked, which are in decimal form.

Here is a simple payroll calculations formula:

The weekly payment for this employee before tax deductions is $764.

You can calculate the final cost manually or using an employee payroll calculator online. If you’re using a weekly payroll calculator, you will have to input the hours worked for one week, but you can also find options for bi-weekly calculations.

When you’re considering calculating paychecks for your staff, remember that the total pay you will come up with does not account for taxes and deductions, i.e., this is the gross pay of the respective employee. The standard deductions you subtract before payouts include insurance premiums, retirement contributions, child support payments, and union membership fees. You will also need to withhold and remit federal, state, and local income taxes, as well as social security and Medicare, to get the final payment that an employee will receive.

Beyond the standard 40-hour work week, properly managing overtime becomes crucial for payroll accuracy and employee satisfaction. Overtime hours exceed the regular full-time employment hours within a given workweek. For example, any hours worked over 40 in a workweek are considered overtime in the United States.

These hours typically attract a higher pay rate — commonly 1.5 times the regular hourly wage, also known as "time-and-a-half." It's essential to accurately calculate and track these overtime hours to ensure correct payment and maintain compliance with labor laws. A well-integrated digital time tracking method can simplify this process, automatically identifying when an employee has entered overtime and applying the correct wage rate.

Remember, transparent and accurate accounting of overtime can help prevent disputes, boost employee morale, and maintain a healthy working environment.

You can eliminate much of the manual work involved in payroll calculations using Hubstaff. Hubstaff is a time tracking and payroll solution that can make payroll straightforward.

Employees can accurately track time on various devices. Then the information from the timesheets is automatically synced into the payroll system. You can automate the payment process by inputting the wage rates and setting the pay period; pay periods can be weekly, bi-weekly, monthly, or twice a month.

Hubstaff time tracking app can integrate with popular payment systems, like PayPal, Wise, Payoneer, and Bitwage. It works seamlessly with accounting tools like Freshbooks, Quickbooks, and Gusto. You can use the automatic payment option or set up manual processing through these channels.

Besides making payroll more effortless for you, a time tracking and payroll solution builds trust and transparency for your team. Calculating hours can be contentious, so employees have no reason to doubt your approach when the process is automated and transparent.