How to Calculate Payroll Hours – An In-Depth Guide

Struggling with payroll accuracy?

Inaccurate calculations can lead to costly errors, unpaid employees, and compliance issues. These mistakes not only hurt your bottom line but also damage employee trust and morale.

You know payroll is vital, yet the complexity of calculating hours correctly can feel overwhelming.

But it doesn’t have to be.

By implementing a few simple strategies and using the right employee time tracking software, you can ensure that every work hour is accounted for and that your payroll process runs smoothly.

In this post, we’ll guide you through the exact steps to calculate payroll hours accurately, saving you time, money, and compliance headaches.  

What are payroll hours?

Payroll hours refer to the total number of payable hours your non-salaried employees work within a pay period. They include regular hours and overtime hours (for non-exempt employees).

Non-salaried employees receive a set hourly rate, so calculating their payroll hours is vital to process their payroll.

Failing to calculate payroll hours correctly opens your business to:

• Employee payment disputes
• Risk of lawsuits
• Penalties for non-compliance with labor laws.

A report by the Internal Revenue Service (IRS) revealed that 33% of businesses make payroll errors every year. That’s billions of dollars wasted in the payroll process.

Now that you know why it’s vital to calculate payroll hours accurately, let’s look at the ways to do it.

What are the methods for tracking payroll hours?

You can track payroll hours using several methods, and the best option depends on your business’s size.

Below are some of the common methods.

Handwritten time cards

A handwritten time card is a basic, cost-effective method of tracking employee time. It involves employees or managers writing hours down on a paper time card.

While this method is simple, it’s often problematic and prone to errors. Employees may forget to write their hours down or write them down incorrectly. Making corrections or back-filling paper time cards from memory at the end of the week (or month) is difficult.

In some cases, employees can also easily fudge their hours, leading to time theft.

With handwritten time cards, hours are tallied up manually before each pay cycle, wasting the manager’s time and introducing room for more potential errors.

Lastly, to comply with federal tax regulations, physical time cards must be stored for at least three years. This takes up valuable office space and adds up to unproductive work.

Handwritten time card pros	Handwritten time card cons
Incredibly simple	Doesn’t work for remote teams
Easy to set up	Not ideal for large teams
Cost-effective	Takes up space
	Too much room for error
	Easily forged
	Difficult to correct
	Time-consuming

Manual time clocks

Manual time clocks include punch cards, biometric readers (like fingerprint scanners), and swipe cards. They are situated at the workplace entrance.

A centrally located clock-in system helps remind employees to track their hours, and a physical system helps reduce the possibility of employees clocking in extra time before arriving or after leaving.

However, this system makes it impossible for employees who don’t come into the office often to clock in and out daily. Like time cards, manual time clocks too create paper timesheets that have to be manually tallied and stored for three or more years.

Manual time clock pros	Manual time clock cons
Helps reduce time theft	Often expensive
Accurate tracking	Tends to require manual tallying
Reminds employees to track hours	Doesn’t work for remote or field employees

Spreadsheets

Using Google Sheets or an Excel spreadsheet to track time is essentially like using a digital version of a paper timesheet.

To create a timesheet in Excel, you simply need to add columns to track dates and in/out times.

You can add columns to hold additional information your company needs, such as breaks, overtime hours, hourly or wage rates, or days of the week.

Spreadsheets are flexible and can be customized to fit your needs and branding. They offer formula functions that allow hours to be added up automatically. 

Plus, if stored in the cloud, they can be accessed from anywhere, making it easy for employees to fill them out.

However, spreadsheets are time-consuming and can be error-prone if not set up carefully. They are also vulnerable to manual error and time theft, so it’s vital to ensure you keep a master copy and let employees work on duplicate versions of the spreadsheet.

Spreadsheet pros	Spreadsheet cons
Easily accessed from anywhere	Employees manually enter work hours
Flexible and customizable	No verification for hours
Cheap, no extra cost if you already use Excel or Google Sheets as your spreadsheet software	Easy to enter incorrect or falsified information
Formula functions reduce errors	Time-consuming to set up and must be set up carefully for functions to work
Easy to store with less chance of loss

Time-tracking software

Unlike manual methods, time tracking software helps ensure that every billable hour is accounted for accurately.

It comes with the following benefits:

• Increased Accuracy: Eliminates guesswork and manual errors, ensuring precise time tracking.
• Enhanced Productivity: Provides insights into how time is spent, helping to identify and eliminate time-wasting activities.
• Better Project Management: Offers a clear view of how time is allocated across projects, aiding in resource planning and project delivery.
• Improved Billing: Ensures every billable hour is captured and invoiced, leading to better cash flow.
• Employee Accountability: Encourages employees to manage their time effectively, fostering a culture of accountability and transparency.

Digital time-tracking software, like Toggl Track, is a user-friendly, efficient solution for tracking employee hours and payroll calculation.

Toggl Track offers automatic time tracking with a one-click start/stop timer and app integrations. It allows employees to track time at a project or task level, assisting client billing. 

Toggl Track also has reminder features to help employees remember to start their clocks, a manual entry mode for offline work, and a mobile app to track time on the go.

Time data can be filtered, sorted, and exported by user, task, or project, reducing admin time and making payroll calculations easier.

Most time-tracking software (including Toggl Track) automatically calculates payroll hours, so there’s no need for manual calculations. Tracked hours are also loaded onto the timesheet automatically, making checking hours easier and eliminating the chance of payroll errors.

Time-tracking software pros	Time-tracking software cons
Highly accurate	More expensive than other options
Save time for payroll and employees	Software with employee surveillance features can be invasive
Robust reporting	Employees need training before they can start using it
Automatic tracking
Data insights
Automated payroll calculations
Great for remote, hybrid, in-the-field, and office-based teams

Most of the options for tracking payroll hours require manual payroll calculations. We’ll look at how to do this in our next section.

How can you calculate payroll hours manually?

A digital clock software can automatically calculate payroll hours for you. Alternatively, you can use a payroll hours calculator spreadsheet, to calculate payroll.

However, there may still be times when you need to calculate the total hours your employees worked manually.

We’ve put together this step-by-step guide to help you:

Step 1. Collect timesheets or timekeeping reports

First, you will need a record of your employees’ clock-in and clock-out times.

Make it a requirement for your employees to complete a timesheet and ensure it is completed fully and correctly. Follow up with employees who haven’t provided a timesheet or provided one with missing information.

Get your employees to submit their timesheets on time to avoid payroll-processing delays.

Step 2. Review employee hours

Check employee timesheets for discrepancies and ensure they match the typical schedule. Ensure any absence or overtime was approved, and if not, follow up with the employee or supervisor to establish the reason and confirm it isn’t a mistake.

If you notice unusual working hours or excessive overtime, investigate the reasons and ensure the hours are accurate.

A time tracking software comes with timesheet approvals to automate this workflow.

Step 3. Calculate the actual daily hours and minutes worked

This step depends on how your business requires employees to track time. 

If your employees track the total daily hours, your work is pretty much done for you. If they track start and end times, you’ll need to subtract the start time from the end to give you the hours for each day.

NB: For accurate time card calculations, ensure your start and end times are converted into military time or 24-hour format (as in 17:35 instead of 5:35 pm).

Then, you’ll need to subtract any unpaid breaks (like their lunch break) from the hours worked to get the total hours.

Some companies require employees to clock in and out for breaks and track this information on their employee timesheets. 

In that case, you must calculate the hours for each worked period the employee clocks. This could be from clocking in at the beginning of the day until the first break, then post-break to clocking out for lunch.

Step 4. Calculate the total actual hours worked during a period

Now, you must calculate the number of hours the employee worked during the pay period (usually a week, fortnight, or month).

To do this, tally up the total hours worked each day.

An important step in calculating hours is to compare the hours worked with the regular workweek hours. To calculate regular workweek hours, multiply the standard workday hours (normally eight) by the number of days in the workweek (usually five). Then, subtract any unpaid breaks.

For example, if your company’s workweek is five eight-hour days with one unpaid 30-minute lunch break per day, your workweek would be 37.5 hours.

You can now establish whether the employee worked overtime in the pay period—we’ll return to this in Step 7.

Step 5. Round the total actual hours

NB: If your company pays for the exact number of hours and minutes worked, skip this step.

Most companies that manually calculate payroll hours round the total actual hours and minutes to the nearest quarter hour, which makes calculations easier. This is because time is denoted in a different numerical system (duodecimal or base 12) than regular numbers (decimal or base 10).

Round the hours up or down to the closest 15 minutes to easily convert to decimal format. To do this, round down any values of one to seven minutes above each interval (00, 15, 30, and 45) and round up any values of eight to 14 minutes above.

So, 32 minutes would be rounded down to 30 minutes, and 38 minutes would be rounded up to 45 minutes.

Step 6. Convert the hours and minutes into a decimal format

This step is easy if you round the minutes to quarter hours in the previous step. Every 15 minutes is represented as 0.25 in decimal format, so you can quickly convert the quarter hours into their decimal equivalents by adding 0.25 for each quarter hour, i.e., 0.25 for 15 minutes, 0.5 for 30, and 0.75 for 45.

It gets more complicated if you pay for every minute worked, as calculations from duodecimal to decimal are complex.

You can divide the number of minutes by 60 to find the decimal equivalent or use this chart we’ve created:

Step 7. Calculate the overtime

NB: This step only applies to companies that pay overtime for non-exempt employees.

Subtract the regular workweek hours calculated in step five from the employee’s total hours to give you the overtime hours.

For example, if your workweek hours are 37.5 and an employee works 45 hours, they worked 7.5 hours overtime.

Multiply this by the overtime rate (usually 1.5 times the regular hourly rate) to give you the overtime payment.

Step 8. Calculate the payment amount

Lastly, multiply the total hours worked (in decimal format) by the employee’s hourly wage to give you the pay amount for the pay period.

If your company pays overtime, add the overtime pay here as well.

Next, let’s look at some best practices for calculating payroll hours.

What are the best practices for calculating payroll hours?

We’ve compiled this handy list of best practices to help you stay on track with your payroll calculations.

Let’s dive in… 👇

1. Establish clear policies and procedures for time tracking and payroll

Firstly, it’s important that every staff member fully understands the payroll and time-tracking procedure and any policies surrounding tracking time and when to submit timesheets. 

If your company pays overtime, ensure staff know whether they are eligible and when.

All time tracking and payroll policies and procedures must be documented and easily accessed by employees should they need to reference them.

2. Train employees on how to track their time accurately

Accurately completed timesheets are crucial when calculating payroll, as is ensuring the hours recorded accurately reflect the actual time each employee has worked. The first step is getting employees to track their time and ensuring they know how to do it accurately.

Include time-tracking training as part of your employee onboarding process and provide guidelines for employees to refer to as needed.

3. Regularly review and audit payroll records for accuracy

It is important that all payroll calculations are double-checked and that records are regularly audited, including overtime, deductions, and total pay amounts.

This ensures that mistakes are caught and corrected before they become larger problems.

4. Stay informed about changes in labor laws and regulations

Payroll is governed by various labor laws depending on where your business is based, such as the Fair Labor Standards Act (FLSA).

Ensure you fully understand these laws to remain compliant and so that employees receive the correct compensation for their worked hours.

These laws also cover overtime eligibility and rates, minimum wage requirements, and mandated breaks.

5. Use a reliable time-tracking system (like Toggl Track)

A time-tracking system like Toggl Track not only helps your employees more accurately track their time. It also takes all the manual work out of calculating payroll.

You can export all the hours your employees have logged in the pay period into an easily digestible report. Reports are accurate and detailed, so you won’t have to worry about contract disputes or when audits come around.

By assigning labor rates to team members, you can quickly calculate their pay from their logged billable hours. You can even track how much they’ve contributed to billable work for your clients.

Next, we’ll show you how to calculate payroll hours automatically.

How can you calculate payroll hours automatically?

Let’s face it: manually calculating payroll hours is time-consuming, inefficient, inaccurate, and outdated, as is tracking time on a time card or paper timesheet.

Time-tracking software is much more suitable for the task.

Toggl Track lets you track time using the web app, mobile app, browser extension, desktop app, and native integrations with various software programs your team uses day-to-day.

All time entries logged in Toggl Track are added to a timesheet that can be submitted to managers for Timesheet Approval to ensure accurate timesheets are sent to payroll.

Users can also review Summary, Detailed, and Weekly reports that break down the time entries according to project, task, user/team, and more. 

Toggl Track integrates with various payroll software, including ZohoBooks and QuickBooks Online.  You can also quickly export all timesheet data from the Detailed Report page to CSV and import it to your payroll system.

Free Google Sheets payroll hours calculator

Do you want to use spreadsheets to calculate payroll hours, but the setup seems daunting? Don’t worry—we’ve got your back.

Download our free Google Sheets payroll hours calculator and get started right away. All the formulas for rounding work hours, deducting unpaid breaks, and converting to decimal format are already added—you just need to edit it to fit your needs and fill it in! 

What are the most common payroll mistakes to avoid?

Making mistakes in payroll can lead to time-consuming corrections, employees becoming disgruntled when paid the wrong amount or paid late, disputes, non-compliance with labor laws, and even costly legal problems.

Here are some common mistakes to avoid:

1. Incorrectly classifying employees

It’s critical to ensure employees are correctly and accurately classified to avoid financial penalties and potential legal issues. 

Classify employees according to their responsibilities, duties, tenure at your company, expertise, and other relevant factors. Then, the classifications determine pay rates, overtime rates, eligibility, and other compensation or benefits such as additional time off or bonuses.

2. Miscalculating overtime or failing to pay it

Overtime calculations add another layer to payroll calculations and, therefore, another area where mistakes can be made. It can be a bit of a gray area as not all employees at your company will be eligible for overtime, so payments may be missed.

Using Toggl Track, your employees can tag their time entries with “Overtime,” allowing you to generate overtime reports and ensure you don’t miss any payments.

3. Not keeping accurate records of employee hours

As mentioned earlier, all timesheets (paper and electronic) must be stored for at least three years to comply with labor laws. Of course, this means a lot of storage space for physical time cards, and electronic ones that aren’t stored in the cloud can easily get lost, damaged, deleted, or otherwise destroyed.

Using Toggl Track, you can quickly access a Summary Report to see the total tracked time by team, client, project, task, billable/non-billable, tag, and description over a set period.

This means you can easily go back to check the reported hours should you ever need to.

As you can see, there are many ways that time-tracking software can streamline your payroll processes. Let’s take a deeper look in our next section.

Streamlining payroll hour calculation with time-tracking software

Using time-tracking software like Toggl Track to track employee time and calculate payroll is a great way to speed up your payroll processes and make payments faster and more efficient.

Some of Toggl Tracks top features include:

• Integrations with payroll software so you can export time data straight into QuickBooks Online, Zoho Books, Xero, FreshBooks, and more.
• Automatic payroll hour calculations to save time and reduce errors.
• Summary, detailed, and weekly reports that assist with viewing employee hours, client billing, and auditing payroll. All reports can be exported in CSV, PDF, and Excel formats.
• Time-tracking reminders so your employees won’t forget!

The bottom line

Accurate payroll calculations are the cornerstone of successful payroll management. Manual calculations are not only time-consuming but also inefficient and prone to errors.

To ensure you stay compliant with labor law (and on the right side of your employees!), it’s vital to ensure all calculations are correct and payroll can be completed as quickly as possible. After all, no one likes to wait longer than necessary for their hard-earned money.

Adopting time-tracking tools and payroll best practices is important for keeping your payroll process streamlined.

Using Toggl Track will help your employees keep accurate records of their worked hours and save you tons of time, as it automatically calculates your payroll hours and payments. Sign up for Toggl Track for free today and see how it can help you improve your payroll.