Let’s face it: You’ve arrived at this article for one reason… You’ve got your mind on your money and your money on your mind!

And, whether you’re an employee trying to decode your paycheck or a business owner making sure everyone’s paid fairly, understanding how to calculate wages and salaries is essential. But don’t worry — we’re not about to throw dry formulas at you and wish you luck.

In this guide, we’re breaking it all down: how to calculate hourly and salaried pay, what to do with overtime, and how to convert between different pay types. We’ll even toss in a free wage calculator and a smarter way to handle payroll (spoiler: less math, more automation).

Let’s get into it!

Salary Vs. Wages

Before we dig into the calculations, let’s define two key terms: salary and wages. While they both represent compensation, how they’re structured — and what that means for your paychecks — is a bit different.

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Salary

A salary is a fixed amount of money paid to an employee over the course of a year, typically divided into equal pay periods (weekly, biweekly, or monthly). Whether the employee works 30 hours or 50 hours in a given week, the individual’s paycheck stays the same. This is common in full-time, professional, or exempt positions. Generally speaking, a salary offers a predictable income stream. 

A salaried employee receives many benefits, including consistent paychecks; pay that is not necessarily based on hours worked; access to benefits, like PTO and health insurance; and an exemption from overtime (depending on classification).

Here’s how to determine a salaried employee’s pay:

Step 1: Find the employee’s annual salary.
Let’s say Taylor earns $60,000/year.

Step 2: Divide by the number of pay periods.
If you pay monthly:
$60,000 ÷ 12 = $5,000 per paycheck

If you pay biweekly (26 pay periods):
$60,000 ÷ 26 = $2,307.69 per paycheck

Optional Step: Add bonuses or commissions.
These should be included in the employee’s gross pay if applicable.

Pro Tip: If your salaried employees are nonexempt, you’ll also need to track hours to calculate overtime. That’s where time tracking tools are still crucial — even with a fixed salary.

Wages

Wages, on the other hand, are paid based on the number of hours worked. Hourly employees’ pay can vary from week to week depending on their schedule. Wages are most common in part-time, non-exempt, or hourly roles — and usually include overtime pay for hours worked beyond 40 in a week. Generally speaking, employees earning wages are paid per hour. (Pro Tip: time tracking software makes it easy for employers and employees to keep accurate records of time worked.)

Employees earning wages receive many key benefits, including the fact that their pay fluctuates with hours worked; overtime pay is often required; and it’s easier to track individual labor costs. This pay structure is common in retail, service, trades, and other hourly based industries.

Here’s a working example demonstrating how to calculate hourly pay. 

Step 1: Total the hours worked.
Let’s say Jordan worked 42 hours this week.

Step 2: Multiply regular hours by hourly rate.
Jordan earns $20/hour, so: 40 hours × $20 = $800

Step 3: Calculate overtime (if applicable).
Overtime = time worked over 40 hours × 1.5 × hourly rate
2 overtime hours × $30 = $60

Step 4: Add it up.
Total pay = $800 (regular) + $60 (overtime) = $860

Pro Tip: Use OnTheClock to automatically track regular vs. overtime hours, apply rates, and generate payroll-ready reports. No calculator required.

Wage Calculator

Let’s make it easy for you! Here’s a free wage calculator tool you can use to simplify the wage ans salary calculation process: 

https://www.calculator.net/salary-calculator.html

Hourly Vs. Piece-Rate Compensation: What’s the Difference?

When it comes to paying employees, one size definitely does not fit all. Whether employees are clocking in at the same time every day, finishing tasks at their own pace, or working toward a predictable paycheck, the structure of their compensation plays a huge role in how they’re paid and how their employer manages labor costs. 

Hourly Pay

Employees are paid a fixed rate for every hour they work. Time is money, and pay can be calculated using simple math: Hours worked × Hourly rate = paycheck.

Pros

• Straightforward to calculate;
• Employees are compensated for every minute on the job; and
• Eligible for overtime (three cheers for time-and-a-half!).

Cons

• Income can fluctuate week to week; and
• Less incentive to work faster or more efficiently.

This approach often works best for retail staff, customer service reps, tradespeople — basically any job where time equals output. 

Piece-Rate Pay

Also called piecework pay, this model compensates employees based on the quantity of work completed. Think: $0.10 per widget, $5 per basket picked, or $15 per assembled product.

Pros>

• Directly rewards productivity
• Employers can predict labor cost per unit
• Great for high-output environments

Cons

• Quality can take a hit if speed is the priority
• Tracking output can be tricky
• Must still meet minimum wage laws

For example, imagine two workers assembling birdhouses. Worker A glues together 1,500 in a day, Worker B does 1,000. With piece-rate pay at $0.10 per birdhouse:

Worker A earns $150

Worker B earns $100

The employer pays exactly $0.10 per birdhouse, keeping labor costs steady and predictable

Pretty cool, right?

Key Considerations for All Pay Types

Minimum Wage: No matter how employees are paid, they must earn at least the minimum wage for their time or output.

Overtime: Hourly employees are usually eligible for overtime, while salaried and piece-rate workers might be, but only if they’re nonexempt.

FLSA Compliance: The Fair Labor Standards Act sets the ground rules. Make sure your pay structure complies!

Quality Control: Piece-rate systems should include checks to ensure workers aren’t sacrificing quality for quantity.

Gross Pay vs. Net Pay: The Battle of the Paycheck

When payday hits, there are two numbers that matter most — but only one of them actually shows up in your bank account.

Gross Pay

Gross pay is the big, bold number that makes you feel rich for a second. It’s your total earnings before Uncle Sam and everyone else dips into your paycheck. Think of it as your “dream” paycheck.

Gross Pay is the whole pie, complete with an employee’s base salary or hourly wages; overtime; bonuses and commissions; taxable reimbursements or incentives; and any other earnings, even capital gains or investment income (if applicable). 

Calculating gross pay for a salaried employee is easy: 

Annual salary ÷ number of pay periods = gross pay per paycheck

If paid hourly:

Hourly wage × total hours worked = gross pay
(Don’t forget to factor in overtime if it applies!)

Jenny earns $60,000 per year and is paid monthly.

Her gross pay = $60,000 ÷ 12 = $5,000 per month

Net Pay 

Net pay is your real paycheck — the money you actually take home after taxes and deductions do their thing. It’s also known as “take-home pay,” and let’s be honest, it’s the one that really matters when rent is due.

Net pay is what’s left after all the fun stuff gets deducted, such as federal and state taxes, Social Security and Medicare (aka FICA taxes), health and dental premiums, 401(k) or IRA contributions, wage garnishments (think student loans, child support, etc.), charitable donations or HSA/FSA contributions, etc. 

In summary, net pay is equal to gross pay minus any deductions. 

In our example (continued): If Jenny has $1,200 in taxes and deductions taken out, her net pay = $5,000 – $1,200 = $3,800. That’s not quite the glamorous $5K, but it’s the true amount that ends up in her wallet.

Taxes and deductions

Ever wonder why your employees’ take-home pay looks a little leaner than their gross pay? Meet the world of payroll taxes and deductions — the behind-the-scenes math that transforms big numbers into bank deposits.

In short: Not all earnings are yours to keep (or theirs to spend). Some of that paycheck is earmarked for taxes, benefits, and other obligations before it even hits the employee's bank account. As an employer, it’s your job to get these deductions right — or risk some pretty unpleasant consequences.

Mandatory vs. Voluntary Deductions

There are two big buckets of payroll deductions. Mandatory and voluntary deductions. 

Mandatory Deductions

Mandatory deductions, which aren’t optional. These are required by law and include:

• Federal income tax;
• State and local income taxes (if applicable);
• FICA taxes – that’s Social Security and Medicare; and
• Court-ordered garnishments like child support or tax levies.

Voluntary deductions

These are optional and usually linked to employee benefits. Employees must give written consent before you can withhold:

• Health, dental, or vision insurance premiums;
• Retirement contributions (like a 401(k) or Roth IRA);
• Union dues;
• Charitable donations; and
• Life or disability insurance.

Pretax vs. Post-tax Deductions

Here’s where it gets interesting — and potentially beneficial.

Pretax deductions are taken out before taxes are calculated. These lower an employee’s taxable income, which can reduce their tax bill and save money. Think: health insurance premiums, commuter benefits, or 401(k) contributions.

Post-tax deductions come out after taxes are calculated. These don’t reduce tax liability but may still be crucial, like Roth IRA contributions or wage garnishments.

How Are Payroll Deductions Calculated?

Each pay period, an employer will use:

• The employee’s W-4 (plus any state or local forms) to calculate federal and state tax withholdings.
• IRS rules to determine FICA taxes — 6.2% for Social Security, 1.45% for Medicare, and an extra 0.9% Medicare tax if earnings top $200,000.
• Court orders or government notices for garnishments.
• Enrollment forms for insurance and benefits elections.

Then it all comes together:

Gross Pay – Pretax Deductions – Taxes – Post-tax Deductions = Net Pay.

Simple, right? Okay, maybe not. But the right payroll provider makes this a cinch. 

Statutory Deductions: Non-Negotiables

These are the government-mandated must-haves:

• Federal income tax: Based on IRS tax brackets and filing status.
• State and local taxes: Vary wildly — from flat rates to no income tax at all.
• FICA: Funds Social Security and Medicare. You withhold 7.65%, and match it as the employer. (Fair’s fair.)

Time Tracking Tools 

Everything we’ve covered so far — from calculating wages and gross pay to getting those payroll deductions right — depends on one thing…

Accurate time data.

If employees are clocking in late, forgetting to clock out, or logging hours manually, you're not just risking math errors — you’re potentially violating labor laws, overpaying or underpaying employees, and losing visibility into your true labor costs.

That’s where time tracking tools like OnTheClock come in. Think of it as your behind-the-scenes hero, making sure the numbers you feed into payroll are rock-solid. Here’s how it helps:

Automatic time tracking: Employees can clock in and out from their phones, a kiosk, or a computer — no more scribbled notes or confusing spreadsheets.

Real-time reporting: Want to know who’s working, when, and where? Done. OnTheClock gives you a clear snapshot of time worked across teams, projects, or locations.

Overtime alerts: Automatically track overtime so you’re not caught off guard by surprise wage increases (and your payroll stays compliant with FLSA rules).

PTO and breaks, handled: OnTheClock tracks paid and unpaid breaks, lunch hours, and PTO balances — so nothing slips through the cracks.

Seamless payroll integration: Push accurate time data straight into payroll. No manual entry. No headaches. Just quick, clean, compliant paychecks.

Whether you're running a crew of five or 50, time tracking is what connects your team’s work in the field to what they get paid. And with OnTheClock, that connection is crystal clear, fully automated, and built to save you time (and a few gray hairs). Try it out free for 30 days and discover the virtues of free, accurate time tracking and, as a result, pristine wage and salary calculations. Honestly, what do you have to lose? For more information, visit www.ontheclock.com.