Calculating payroll and hours worked

Calculating payroll and hours worked is simple but can be a hassle. You add up all the time an employee worked that week or month, convert time to decimal format, and multiply it by their hourly rate. Here's how you can automate the process and have payroll calculated in less than a minute.

Calculating payroll and hours worked illustration

Part I: Tracking hours worked

Employees need to track how much time they spend on activities. They can track time by filling out physical time cards or electronic timesheets, punching time clocks, or using a timer app.

Depending on businesses needs, employees can track how much time they spend on each particular project and activity, or they can just enter how much time they spent working that day.

Employees can use a timer or enter work hours in their timesheet at the end of the day.

Timesheet where employees enter hours worked for calculating payroll Learn more about: Work hours tracker | Time card calculator | Timesheet app

Part II: Calculating payroll

Once you have the time data and know who worked how many hours, you can start calculating payroll.

Manual calculation (using physical time cards)

  1. Convert all start and end times to 24-hour format
  2. Take end time and subtract it by start time for each time card to get time duration
  3. Convert from clock time format to decimal number format by dividing the minutes worked by 60 and adding the fraction to whole hours (eg. 38:27 will become 38.45). In Excel, you can convert from clock format to decimal format by multiplying a cell with 24 (eg. =A1*24) and formating the resulting cell as a number
  4. Reduce the total duration by unpaid breaks (if any)
  5. Add up all of the hours in the week to get the total hours for weekly payroll
  6. Multiply hourly rate by total hours for each employee to determine gross pay

Automatic calculation (using time tracking software)

  1. Define default hourly rate for each employee (and special rates if you have projects that use a different rate)
  2. In the time report, select the time range for which you need calculated hours (week, month, or some custom period)
  3. Filter out time entries for unpaid break or lunch time
  4. Software will automatically get total hours worked for each employee and calculate how much you need to pay them
  5. Export report as PDF, or as Excel in case you need to perform more advanced calculations
Automatic calculation of hours worked and payroll in Summary report Export time data in Excel spreadsheet

By using time tracking software, you can save a lot of time, plus be sure that your payroll data is highly accurate and that your employees receive the proper pay for hours worked.

Managing payrolls using Clockify reports

  1. Open the Detailed report to see all time entries from all employees.
  2. In the report's filter, select the team member for whom you need to calculate the payroll, and press "Filter".
  3. Select the date range in the upper right corner. (If you're using This or Last Week, but the first day of the week isn't right, you can change it in your User Settings.)
  4. Click on the save icon to create a new saved report. In the report's name field, write employee's name and the date when the payment was made (eg. Jamie Davis 06/24/2018).
  5. Repeat the process each week or month: to check how many hours have been accumulated after the last payment, select the date range from the day after last payment was made to the current day (eg. 06/24/2018 to 07/01/2018).

Notes for calculating payroll

Time rounding

To make payroll calculation easier, employers are legally permitted to round employee hours worked to the nearest 1/4 or 1/10 of an hour for payroll purposes.

If your business operates in the US (and are subject to Fair Labor Standards Act), time can't be rounded down. For example, if an employee worked anywhere between 38-44 minutes, time should be rounded up to 0.75 hours; if 31-37, time should be rounded down to 0.5 hours.

What about rounding interval? You can round time to nearest 5 minutes, or one-tenth or quarter of an hour (5,6,15).

Some business don't round to quarter of an hour but instead to 1/10th so numbers are nice and clean when converted to the decimal format.

Is rounding necessary these days? Not really. Time rounding was a time-saving practice back when clerks processed payroll by hand. But thanks to modern time tracking software, time rounding doesn't lessen administrative cost of calculating payroll as it used to. Instead, software can track time to the minute and calculate payroll down to a cent.

If you rely on time rounding for other reasons, software can still round each time entry to the nearest interval automatically, and then use the rounded values when calculating payroll and other things.

Factoring in overtime work

Most often, you'll be dealing with regular work hours. But sometimes, employees will work overtime, or during weekends and holidays.

Overtime (hours worked beyond 40 every week) is typically paid at a 50% higher rate than regular work. For example, if an employee worked 50 hours during a week at a $10 hourly rate, their pay is $550 for that week (40h*$10 for regular hours + 10h*$15 for overtime).

Higher hourly rate for working during weekends or holidays is generally a matter of agreement between the employer and the employee. As long as total hours worked don't exceed 40 hours per week, pay rate isn't subject to federal or state laws (unless you have a contract that stipulates otherwise, or you want to give employees financial incentive to work during holidays or weekends).

When calculating payroll for these more advanced scenarios, it's best to export raw time data in Excel and let Excel calculate payroll based on the data you have.

In Clockify, employees can attach an "overtime" tag so you can later see in reports how much overtime work each employee has and see in greater details which time entries are for overtime work.

Factoring in breaks

Breaks usually last from 5-20 minutes (rest) or 30-60 (meal).

Rest breaks are included in total time an employee works, while meal breaks can but don't have to be included.

To account for breaks in the time tracking software like Clockify, it's best to create a separate entry for them and categorize them either by project or a tag:

Accounting for break time in time tracking software

By keeping breaks separate from project time logs, employees can account for all of their required 8h/day, and managers can see how much time projects really took.

Working with timesheets

It's best practice for employees to fill their timesheets at the end of each day. This way, there's less frustration and error, and entering time is much faster.

If employees need to leave a note for some time or maybe denote it as overtime or something, they can switch to the time tracker and there enter notes in description field as well as change start-end time and apply tags.

All they have to do is select what they worked on (if the activities are not already selected) in the timesheet, and enter how much time they spend in total on each task. The whole processes shouldn't take longer than a minute.

If someone forgot to fill their timesheets, you can easily see that in the weekly report. Weekly report shows you how much time each member tracked in total for each day in the week. If you see they tracked less than 8 for any day, you can remind them to check their timesheet if they want to be compensated properly.

Weekly report calculates time duration and hours worked for each team member
Weekly report calculates time duration and hours worked for each team member.

While being able to edit timesheets is useful, you should lock timesheets after a certain time so no more changes can be made. Depending on how often you process payroll, you can lock timesheets for previous period every week or month.

This way, people have the chance to get their timesheets in order. Once timesheets are locked, you can export data and start calculating payroll safely, knowing that nothing will change.