Learning how to calculate work hours is an essential skill that all managers need.
It doesn’t matter if your business outsources payroll or does it in-house, knowing the basics can help you create better schedules, control your labor budget, and keep your team happy and engaged.
In this article, we discuss the five steps necessary for successful payroll and see how these steps apply to a hypothetical employee.
Table Of Contents
Work Hours Defined
Before you sit down to calculate work hours, it’s crucial to understand exactly what numbers you’re crunching and how important those numbers (and the records on which they appear) are to your business.
In the case of your employees’ time at work, it’s not an arbitrary definition that differs from one business to the next. The federal government actually sets the standard.
The United States Department Of Labor (USDOL) defines work hours as:
[The] time an employee must be on duty, on the employer premises, or at any other prescribed place of work.
And because the USDOL is the one doing the defining, it applies to every business that sets up shop in the United States. Work hours, then, are the same for businesses of all sizes and types, no matter where they’re located.
The important thing to keep in mind about all this is that time cards (in whatever format you adopt) are legal documents. That means they can be used in legal proceedings as evidence.
The IRS can also ask you to produce records of time worked going back as far as two years to ensure that you were and are compliant with local, state, and federal labor laws. That’s why it’s important to keep accurate records and retain those records for at least two years.
How To Calculate Work Hours
The best way to learn how to calculate work hours is to watch it being done and then go do it yourself. We can help with the first part.
For the purposes of this exercise, we’ve created a hypothetical employee named Katie.
Katie works at a restaurant where her primary responsibility is acting as hostess, for which she is paid $15 per hour. Sometimes, though, Katie fills in as a server when someone calls in sick. For this job, she is paid $10 per hour (this becomes important in step four).
Armed with employee and pay-rate information, it then becomes a matter of setting policies and procedures that govern the way you handle the numbers involved. After that, it’s just a matter of using those numbers to do a bit of simple math to figure out each employee’s paycheck.
1) Choose The Way Your Business Will Track Time
Setting up an effective method to calculate work hours starts with choosing the way your business will track time.
At the most basic, there are three ways to do so:
- A written sign-in sheet
- A clock that prints the time on paper time cards
- A computer-based tracking system
That said, there are systems available that combine different aspects of each method to better suit the needs of your business.
For example, imagine that you chose a system that includes paper time cards for the employees and a time clock that both prints on the card and stores the information in a computer database for easy payroll processing.
In our hypothetical situation, Katie would walk into the break room, retrieve her card, and insert it into the time clock. The unit would then record 9:00 a.m. on her paper card and in the master database as the time she arrived at work.
2) Set A Time Format
Setting the time format that your business uses may not seem like an important decision at first, but it can have a big impact on the way you calculate work hours later on. The two most common time formats are standard and military.
Standard time format is what you see when you look at most clocks: the time from one to twelve. Recording standard time requires the addition of “a.m.” or “p.m.” to differentiate between morning and afternoon.
Military time counts the morning hours just like the standard format (e.g., 7:24 a.m., 9:11 a.m., 11:47 a.m., etc.). But after 12:59 p.m., military time begins counting by adding an hour to twelve.
For example, 1:00 p.m. in standard format would be 13:00 in military time. You’ll notice that you don’t need the “p.m.” to indicate afternoon as you do with standard time format. That’s because the other one o’clock (in the wee hours of the morning) is written 01:00.
Why is this important? Because choosing military time makes figuring out the hours worked extremely easy if you have to do it manually. We’ll use Katie as an example.
Let’s say Katie clocked in at 9:00 a.m. (standard format) and clocked out at 5:00 p.m. You’re going to have to do some roundabout math to calculate the hours worked since you can’t simply subtract one number from the other in this case.
Now, let’s say that Katie clocked in at 09:00 (military format) and clocked out at 17:00. Calculating the hours worked becomes simply a matter of subtracting nine from 17 to get eight. So, Katie worked eight hours that day.
3) Set Up A Rounding Policy
Very rarely will all of your employees clock in and out precisely on the hour. There are going to be some people early and some people late. This is where a rounding policy becomes crucial.
The United States Department of Labor recommends that businesses calculate work hours in fifteen-minute increments. Employee time from one to seven minutes rounds down, while time from eight to fourteen minutes rounds up.
For instance, if Katie clocks in at 08:58 and clocks out at 17:02, she’s worked for eight hours and four minutes. That would round down to a straight eight hours.
If, however, Katie clocks in at 08:58 and clocks out at 17:10, she’s worked for eight hours and twelve minutes. That would round up to eight hours and fifteen minutes.
4) Separate Work Time Into Categories
In some industries, like the hypothetical restaurant business mentioned at the beginning of the How To Calculate Work Hours section, employees can work different jobs at different pay rates.
Remember, Katie works as a hostess for $15 per hour but sometimes fills in as a server for $10 per hour. When this occurs, it’s important to separate each block of time into the different pay rates so you can pay Katie accordingly.
For example, during one week, Katie works 25 hours as a hostess and 15 hours as a server. Because your business pays different rates for those jobs, it will directly affect your calculations, your labor budget, and the final paycheck that Katie receives.
It becomes a legal issue when you fail at this step, so, if it applies to your business, we recommend prioritizing sorting work into categories so that everything is calculated correctly.
5) Calculate Work Hours For The Week
Now, it’s time to calculate work hours.
In this example, she worked only one position — hostess — for the entire week. As such, here’s the data for those seven days:
Monday: 10:00 to 17:00 (7 hours)
Tuesday: 08:55 to 17:00 (8 hours — the five extra minutes round down)
Wednesday: 08:58 to 17:02 (8 hours — the four extra minutes round down)
Thursday: 08:59 to 17:10 (8.25 hours — the 11 extra minutes round up)
Friday: 09:00 to 17:00 (8 hours)
Adding all of this up, Jane worked a total of 39.25 hours as a hostess.
How To Handle Errors When Calculating Work Hours
When you calculate work hours, you want your math to be error-free. But what happens if there are tracking errors on the original time card?
In such cases, your standard operating procedure should be to inform the employee of the error or errors, make any necessary adjustments, and have them initial the changes.
For example, Jane clocked in for her hostess shift at 10:30 but forgot to clock out at 16:30.
To resolve this situation, you would first consult with her manager to verify that she didn’t work more hours than indicated on the schedule (i.e., 10:30 to 16:30 or six hours).
With a red pen, write 16:30 in the blank on her time card and then have Jane initial the adjustment for verification. You can then proceed with the rest of the payroll process.
What To Do After Calculating Work Hours
If you subcontract your payroll processing to an outside company, learning how to calculate work hours may be the end of your responsibilities.
But if you, or your in-house HR department, process the business’s payroll from raw time card all the way through to the final check, there’s much more to do with Jane’s total work hours.
1) Calculate Gross Pay For The Pay Period
The first thing to do after you calculate work hours from Jane’s timesheet is to calculate gross pay for the period worked (in Jane’s case, one week).
We established in steps four and five of the previous section that Jane’s pay rate is $15 per hour and that she worked as a hostess during the week for a total of 39.25 hours.
With those numbers in mind, you can calculate Jane’s gross pay. Simply multiply Jane’s total hours worked for the week by her hostess pay rate of $15 per hour.
Here’s how it breaks down:
Gross Pay = 39.25 hours x $15 per hour
Gross Pay = $588.75
At this point, you’ve reached a dollar amount, and you might think you’re done. But this dollar amount is gross pay — it’s the amount Jane earns before taxes, benefits, and other payroll deductions are withheld.
So, the $588.75 isn’t the final dollar amount you write on Jane’s check. It’s the starting point for the rest of the process.
2) Take Out Voluntary Deductions
Most voluntary deductions come from an employee’s W-4 and typically take the form of extra taxes they want you to deduct from their paycheck.
If you neglect to follow their wishes, your business could be held liable for the money — meaning you’d likely have to pay it (as a lump sum or in installments) along with a substantial penalty later on down the road.
The IRS calculates the penalty on the lateness of the payment (in days), so it’s in the best interest of your business to verify that you’ve deducted the right amount for each employee every time you run payroll.
But extra taxes aren’t the only voluntary deductions your employees may opt for.
Depending on the type of business you run, you may choose to offer other voluntary benefits, including:
- Life insurance
- Health insurance or savings account
- Commuter benefits
- Retirement contributions
- Payment for a company gym membership
Whatever those dollar amounts may be, and whichever benefits the employee chooses, you must deduct the total from their gross pay.
Here’s an example using Jane’s gross pay from the previous step.
Jane has chosen to have the following deductions taken out of her check:
- Retirement contribution — $50
- Life insurance — $10
- Health savings account — $10
- Extra tax (as indicated on her W-4) — $30
Those voluntary deductions total $100.
From there, subtract the total voluntary deductions from Jane’s gross pay.
Gross Pay After Voluntary Deductions = Gross Pay – Total Deductions
Gross Pay After Voluntary Deductions = $588.75 – $100
Gross Pay After Voluntary Deductions = $488.75
With that number in hand, you’re ready to move on to the next step.
3) Subtract Mandatory Taxes
Calculating, subtracting, and paying mandatory taxes is one of the most important parts of what you do after you calculate work hours.
If you neglect to pay the taxes owed — or your figures are incorrect (accidentally or intentionally) — the IRS can implement penalties, fines, and even legal proceedings against your business.
That’s why it’s so important to consult with an attorney or accountant who is familiar with your industry and the area in which it operates.
They can tell you which mandatory taxes you may need to deduct from your employees’ paychecks, including:
- Federal income tax
- Social Security and Medicare (known collectively as the Federal Insurance Contributions Act or FICA)
- State taxes
- Local taxes
Keep in mind that this is not an exhaustive list. There may be other mandatory taxes that your business is required to pay.
For now, we’ll focus on the FICA deductions and see how the process applies to Jane’s gross pay.
According to the IRS, employers must deduct a total of 7.65% from each employee’s paycheck for this tax (visit the IRS website for more details).
Here’s the equation for figuring out After-Tax Pay:
Gross Pay After Voluntary Deductions – (Gross Pay After Voluntary Deductions x 7.65%)
When you plug in Jane’s gross pay after voluntary deductions ($488.75) and the FICA percentage (7.65%), you get:
After-Tax Pay = $488.75 – ($488.75 x 7.65%)
After-Tax Pay = $488.75 – ($37.38)
After-Tax Pay = $451.36
Next, you would calculate the other mandatory taxes (e.g., Federal, State, and Local) and subtract them from this number.
Once you’ve deducted all the taxes required by law, you’re ready to move on to the final calculation of the payroll process — though there’s still more to do after that.
4) Calculate Net Pay
So far, you’ve learned how to calculate work hours, figure out gross pay, take out voluntary deductions, and subtract mandatory taxes.
The last bit of math you’ll have to do is to calculate net pay — the amount you write on each employee’s paycheck.
If your business has no other programs (deductions or additions) in place, the After-Tax Pay you found in the previous step may be the final number.
If your business does have other deductions or additions in place (e.g., tip credits, withholding, penalties, bonuses, etc.), you would subtract them or add them at this point.
For example, let’s say that your restaurant has established a tip-pooling program and Jane’s contribution for the week is $20.
Your business has also set up an employee engagement program that includes a bonus once a team member achieves a certain goal or milestone.
Jane reached just such a milestone this week and won a $30 bonus.
With those numbers in mind, you can figure out Jane’s net pay with the following equation:
Net Pay = After-Tax Pay – Other Deductions + Other Additions
Net Pay = $451.36 – $20 + $30
Net Pay = $461.36
That number — $461.36 — is the net pay (the total dollar amount) you would print on Jane’s paycheck for this particular pay period.
5) Distribute Employee Paychecks
On the employee side of things, the final step in what you need to do to calculate work hours is to distribute paychecks to each team member.
Your business will likely have its own method for doing so, but you may also give your employees a choice of how they would like to receive their paycheck.
Every business is different, but common distribution methods include:
- Direct deposit
- Payroll card
- Mobile wallet
Choose the option or options that work best for you and your team.
6) Pay Your Taxes On Time
After you’ve gone through all the math necessary to calculate work hours, take out voluntary deductions, subtract mandatory taxes, and calculate net pay, you must send the taxes to the proper authorities by the set due date.
Most taxes are due by the 15th of the following month — e.g., October taxes are due by November 15th — but be sure to consult with an attorney or an accountant in your area.
Keep in mind that your business may owe taxes that don’t come out of your employees’ paychecks.
The FICA numbers that you figured earlier, for example, are only one part of the total tax your business owes.
The total Social Security and Medicare withholding rate is 15.3%. Each employee pays 7.65% from their paycheck, but you, the business, are responsible for paying the other 7.65%.
Failing to pay this tax — or failing to pay it on time — can result in significant penalties and fines. In egregious situations, your business may even face legal action that can hinder its ability to operate successfully.
Be sure to pay all applicable taxes to the proper authorities by the requisite due date.
Calculate Work Hours Faster With Software
Want to calculate work hours faster and have a general idea of what your labor budget looks like before you actually crunch the numbers? Harness the power of the Inch software to make everything from scheduling to time tracking to task management easier and more streamlined.
With Inch, you can create the best workflow possible, get a sense of the hours your employees are going to work beforehand, and still have time to focus on other tasks that drive your business forward.
The app also gives you and your employees the ability to perform a wide variety of tasks from smartphone, tablet, laptop, or desktop, including:
- Working from a shared task list
- Getting clarity on work that needs to be done
- Receiving voice-assisted reminder notifications
- Clocking in and out of tasks at different locations
- Completing work assigned to them
- Communicating with managers and each other
Whether you need help setting up when each team member will work or what tasks they will perform, Inch gives you unprecedented control over an inherently complicated process and makes it easier than ever to calculate work hours for your team and your business.
For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit TryInch.com today.