Pay Calculation: What It Means for Employers

What it means in practice

Every paycheck is the result of the same chain of calculations. The employer counts the hours worked in each workweek, prices them at the right rates to reach gross pay, removes amounts that are excluded from taxable wages, figures and withholds taxes, subtracts the remaining deductions, and pays what is left. This entry walks through that chain at the federal level. It is the core arithmetic of payroll. State and local taxes and state wage laws add their own steps, covered briefly below.

Step 1: Fix the workweek and count hours worked. Under the Fair Labor Standards Act (FLSA), the workweek is the unit of measure. It is a fixed and regularly recurring period of 168 hours, seven consecutive 24-hour periods, that may begin on any day and hour and stays fixed regardless of the schedule (29 CFR 778.105). It is the standard for applying the Act (29 CFR 776.4), and hours cannot be averaged across weeks, however often the employee is paid (29 CFR 778.104). Work that is not requested but is "suffered or permitted" is work time if the employer knows or has reason to believe it is being done, and a rule against it is not enough on its own (29 CFR 785.11 and 785.13). Fact Sheet #22 says short rest periods count as hours worked; bona fide meal periods generally do not. Rounding punches to the nearest 5 minutes, tenth or quarter hour is accepted only if, over time, employees are still paid for all time actually worked (29 CFR 785.48). See hours worked for the detailed rules.

Step 2: Price the hours. For hourly employees, hours up to 40 in the workweek are paid at the agreed rate, which is straight-time pay. Covered, non-exempt employees must receive overtime of at least one and one-half times the regular rate for hours over 40, and the regular rate may never be below the statutory minimum (29 CFR 778.107). The regular rate is an hourly rate even for employees paid by salary, piece rate or commission: total remuneration for the workweek, except statutory exclusions, divided by hours actually worked (29 CFR 778.109). A salary is divided by the hours it is meant to cover, after converting a monthly salary to weekly by multiplying by 12 and dividing by 52 (29 CFR 778.113). Overtime earned in a workweek is generally due on the regular payday for the period in which that workweek ends (29 CFR 778.106).

Step 3: Check minimum wage for each workweek. The federal minimum wage is $7.25 an hour, effective July 24, 2009, and the Department of Labor notes that some state laws provide greater protections and employers must comply with both; see minimum wage. Because the workweek is the standard, a biweekly or semimonthly paycheck still has to satisfy the minimum for each workweek inside it. Wages must be paid "free and clear." If an employee must buy tools of the trade or similar items for the employer's work, there is a violation in any workweek where that cost cuts into the minimum or overtime wages required (29 CFR 531.35). Deductions for items that are not board, lodging or other facilities are illegal to the extent they reduce wages in a workweek below the required minimum (29 CFR 531.36(b)).

Step 4: Total gross pay. Gross pay adds straight-time pay, overtime premiums, bonuses, commissions, paid leave and other compensation. IRS Publication 15 (2026) says wages subject to federal employment taxes generally include all pay given to an employee for services, in cash or other forms, and that overtime pay is subject to Social Security, Medicare and FUTA taxes and to federal income tax withholding. See gross income.

Step 5: Subtract pre-tax deductions. Some deductions come out before certain taxes are figured, and they do not all reduce the same tax bases. Publication 15's exemption table shows elective deferrals to a 401(k) plan as generally exempt from federal income tax withholding but taxable for Social Security, Medicare and FUTA. IRS Publication 15-B says a cafeteria plan provides qualified benefits, including accident and health benefits, on a pre-tax basis, and lists accident and health benefits as exempt from income tax withholding, Social Security, Medicare and FUTA. So one paycheck can have two taxable wage figures, one for income tax and one for FICA. See pre-tax deduction.

Step 6: Figure federal income tax withholding. Publication 15 says employers should have a Form W-4 on file for each employee to know how much federal income tax to withhold, and that a new employee who does not provide a completed 2026 Form W-4 is treated as Single or Married filing separately with no entries in Steps 2, 3 or 4. Employers then use one of the methods in Publication 15-T, such as the wage bracket tables or the percentage method; see Form W-4. The 2026 percentage method worksheet (Worksheet 1A) annualizes the period's taxable wages, adjusts for the W-4 entries (including a $12,900 or $8,600 subtraction when the Step 2 box is not checked), applies the annual rate table and divides back to the pay period. Bonuses and other supplemental wages paid separately, or combined but specified separately, may be withheld at a flat 22% if income tax was withheld from the employee's regular wages in the current or preceding calendar year; the mandatory rate is 37% on supplemental wages over $1 million in the year (Publication 15, section 7).

Step 7: Withhold Social Security and Medicare. For 2026, Publication 15 lists Social Security tax at 6.2% each for employer and employee on wages up to the $184,500 wage base, and Medicare tax at 1.45% each with no wage base limit. The employer stops collecting the employee share of Social Security once the employee's 2026 wages reach $184,500 but keeps withholding Medicare on all wages. Separately, the employer must begin withholding the 0.9% Additional Medicare Tax in the pay period in which it pays wages over $200,000 to an employee, and continue through the end of the calendar year; there is no employer share. These are explained in FICA. The employer also pays its matching FICA share and FUTA tax (6.0% on the first $7,000 of each employee's 2026 wages before state credits), which Publication 15 says is never withheld from wages.

Step 8: Subtract after-tax deductions. Deductions that do not reduce taxable wages, such as many voluntary benefit premiums, charitable gifts or repayments, come out of pay after taxes are figured; see after-tax deduction and the overview of payroll deductions. The Step 3 limits still apply to deductions that benefit the employer.

Step 9: Apply garnishments within the limits. A garnishment order is calculated on disposable earnings, which the Department of Labor's Fact Sheet #30 describes as earnings left after legally required deductions such as federal, state and local taxes and the employee share of Social Security and Medicare; voluntary deductions such as insurance premiums and union dues generally are not subtracted. For ordinary debts, the weekly amount garnished may not exceed the lesser of 25% of disposable earnings or the amount by which they exceed 30 times the federal minimum hourly wage (15 U.S.C. 1673(a)). Fact Sheet #30 puts that floor at $217.50 weekly and $435.00 biweekly. Support orders, tax debts and bankruptcy orders follow different rules, and where a state law results in less being garnished, that law controls. See garnishment.

Step 10: Pay net pay and keep the records. What remains is net pay, the amount delivered to the employee, usually itemized on a pay stub. The FLSA does not set a pay frequency; the Department of Labor's state payday table (last revised January 1, 2023) shows that states do. FLSA payroll records must show, among other items, when the workweek begins, hours worked each workday and workweek, straight-time and overtime earnings, additions and deductions, total wages and the pay date (29 CFR 516.2). Publication 15 says employment tax records should be kept for at least 4 years.

Where states differ. This entry describes the federal baseline, and state rules can change several steps. Two examples from official state pages: the California Department of Industrial Relations overtime FAQ says overtime is owed for hours over eight in a workday, at one and one-half times the regular rate through 12 hours and double time beyond 12, which changes Step 2. The New York State Department of Labor says it is illegal to deduct for breakages, cash shortages, fines, losses to the business and deductions not listed in section 193 of the Labor Law, which changes Steps 8 and 9. States also set pay frequency and income tax withholding. Check your own state agency; the Department of Labor lists state labor offices.

Questions employers ask. Is overtime still subject to withholding now that employees can deduct qualified overtime? Yes. Publication 15 says overtime is subject to federal income tax withholding, and separately notes that for tax years beginning after 2024 and ending before 2029, individuals may deduct up to $12,500 ($25,000 married filing jointly) of qualified overtime on their returns. Can we average a biweekly period to avoid overtime? No; each workweek stands alone (29 CFR 778.104). Do we calculate overtime on a salaried non-exempt employee? Yes, on the hourly rate derived from the salary (29 CFR 778.113); see salaried non-exempt.

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