How to Calculate Payroll Hours
One of the big questions that come up when working with hourly employees is how to calculate time for payroll.
Most payroll systems work with certain time intervals, like 15 or 30 minutes, and can’t account for shorter periods of time. On top of that, tracked hours typically are recorded as hours and minutes.
To accurately create your payroll, you probably need to do some math to convert between the two and calculate the total time worked.
Step-by-step: how to calculate payroll hours
For every business, accurate accounting of employees’ hours is essential. You need to be precise, as potential mistakes can turn into a serious problem and can even lead to lawsuits. At the same time, you also want to prevent your employees from committing time theft and protect your company.
The first step to correct payroll calculation is to establish a working system for time tracking. Then you need to apply the right method for payroll time conversion of minutes. Finally, you have to multiply the correct hours by the respective wage rate, and subtract taxes and deductions to get to the final payout amount.
Let’s dig into the details.
How to calculate timesheet hours
There are many methods for calculating timesheet hours, but they all start with employees logging the time they have spent on jobs or work tasks. Their logged hours can be either dedicated to a specific project, or can count for the overall time that a team member has spent in working for a particular company within a time period.
Time tracking can be done by filling out paper timesheets, punching time cards, or running an online timesheet software. Today most companies use digital platforms for time tracking.
They give a number of clear benefits over old-school time cards, two of the biggest being improved accuracy and ease of use. Employees can manually enter the time they have worked in a timesheet at the end of each day, or they can use a tool that tracks their time on the go.
You have to decide how to add up hours for payroll, and there are two main way to go about doing that:
1.Use the actual time that an employee has recorded. This means that if they noted 5 hours and 13 minutes, this is what will be used for their payroll.
2.Use rounded hours, which entails that you set up your method for timesheet rounding. Then the minutes after a whole hour are rounded according to a particular method. In all cases, you should make sure to subtract any unpaid breaks and lunchtime.
Actual time calculation
You can choose to calculate on the basis of the exact hours worked, but you need to make sure that your time tracking solution allows it.
This is how the calculation works:
You first need to add the whole hours, which means 5 days multiplied by 8 hours. This adds up to 40 hours for the week.
Then you have to add the minutes. In this case: 13+7+4+9+2 = 35 minutes
The total hours for the week come up to 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.
Rounded time calculation
You might decide to use rounding in your payroll calculations. While the practice of timesheet rounding is legal under federal law in the U.S., you need to follow strict rules as to how you apply it.
You cannot round to more than 15-minute intervals. This means that you can use the following minutes after an hour: :00, :15, :30 and :45. When an employee has clocked in or out at times different from the 15-minute intervals, you can round to the nearest one, which can be either up or down.
You also have to follow the 7-minute rule if you’re applying 15-minute rounding. It states that if a logged time is within 7 minutes from such an interval, you have to round down. If it is above 7 minutes, you have to round up.
Here are some examples:
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 you round up or down, you have to subtract the clock-in time from the clock-out time to receive the number of hours and minutes that an employee has worked during a specific day.
Let’s say the person clocked in at 9:08 am, which is rounded to 9:15 am, and clocked out at 5:28 pm, which is rounded to 5:30 pm.
First you need to convert all hours in the 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. Don’t forget that this has to be converted to decimal format before you use it for payroll calculation.
You can also use other rounding options, such as 5-minute or 6-minute rounding. In both cases, the rounding should be either 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 that’s only in your employees’ favor, but you cannot legally round time always in your interest. A tried-and-true way that 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 calculation — you have to keep in mind 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 in which you need to use the overtime rate, such as weekend working hours or other special occasions.
Payroll time conversion
The next issue that you need to tackle is how to calculate hours and minutes for payroll. Whether you’ve used actual or rounded timesheet hours, you will end up with the logged time in the format of hours and minutes.
However, if you calculate this time with the wage rate, you will not get the correct final payroll cost. You have to convert the minutes into decimals, or parts of one hour. This is necessary, as the wage rate is formulated per one hour.
In order 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 hours. This is the number that you can use in the next step, where you multiply by the wage rate.
Credit: Patriot Software
Final payroll cost per employee
When you have the timesheet hours for a certain employee and you have converted the time in decimal format, you can move to the final step of the calculation. It entails multiplying the wage rate that’s been agreed by the hours worked, which are in decimal format.
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 by 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 how to calculate paychecks for your staff, keep in mind that the total pay that you will come up with does not account for taxes and deductions, i.e. this is the gross pay of the respective employee. The most typical deductions you will need to subtract before payouts include insurance premiums, retirement contributions, child support payments, and union membership fees, among others. 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.
Hubstaff can help with your payroll calculation
A lot of the manual work involved in payroll calculations can actually be eliminated. Hubstaff is a time tracking and payroll solution that can save you a ton of time and effort.
Employees can accurately track time via the software on various devices. Then the information from the timesheets is automatically synced into the payroll system. You can automate the payments process by inputting the wage rates and setting the pay periods, which can be weekly, bi-weekly, monthly, or twice a month.
Hubstaff integrates with the most popular payment systems, like PayPal, TransferWise, Payoneer, and Bitwage. It also works seamlessly with accounting tools like Freshbooks, Quickbooks, and Gusto. You can either use the automatic payment option through these channels, or set up manual processing.
Besides making payroll easier for you, a time tracking and payroll solution builds trust and transparency for your team. Calculating logged hours can be a contentious issue, so when the process is automated and clear then employees have no reason to doubt your approach.
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