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Payroll simulator

Anything that smooths the daily functions of your payroll and HR teams is valuable to your entire organization. That’s why many human resources and workforce management software solutions now offer an hourly paycheck calculator designed to provide general estimates of an employee’s correct annual salary amount. Beyond estimating an individual employee's yearly salary, paycheck calculator solutions can help employers estimate their overall payroll for an entire workforce. Considering that payroll accounts for roughly 20 to 30% of a company's annual expenses, being able to make accurate forecasts of payroll costs can make a huge difference in areas ranging from labor costing to hiring and recruiting to benefits administration.

What does a paycheck calculator do?

A paycheck calculator can be especially useful in helping mid-sized and small businesses determine both their employees' gross pay and net pay after income taxes. Generally speaking, the term "payroll" is defined as the total of gross wages an organization pays to its employees for a specific period of work, minus all payroll taxes, withholdings, and insurance owings. Processing payroll usually means accounting for:
  • Tracking employees' hours worked
  • All federal, state, and local taxes withheld
  • Employee bonuses and commissions
  • Employee benefits packages
  • Paid leave for vacations, sick days, and other paid time off
  • Costs of administering all of the above
An automated paycheck calculator pulls together all of that information and calculates the total expense of both individual employee salaries and wages and total payroll for the overall workforce. Most payroll simulator programs calculate take-home pay for hourly employees based on gross pay, hourly rate, number of pay periods, dependents, filing status, and other tax considerations. Those are combined with tax withholdings for federal, state, and local taxes, and withholdings for social security and other specific requirements. Some of the data necessary for a payroll calculator to make an accurate forecast might include:
  • Gross pay
  • Payment frequency
  • IRS Form W-4 data
  • Federal, state, and local tax withholdings
  • Exemptions for federal taxes, FICA, and Medicare
  • Voluntary deductions
The exact method used to calculate an employee's gross pay generally begins with dividing the amount of an annual salary by the number of pay periods in a year. To calculate net pay, the employer must then subtract all payroll taxes and deductions from the gross pay figure. Following all of those steps by hand for an entire workforce can be a time-consuming and expensive process, and it is all too easy for costly human errors to slip through the cracks. That is only one of the many reasons that more and more businesses are choosing to invest in automated paycheck calculators and payroll simulator tools. On the individual level, a payroll calculator tool can also be very useful for helping employees manage their retirement savings. An automated paycheck simulator can help your HR team provide guidance to employees about how much money to set aside for their 401(k) contributions and other retirement plans. When a worker can see their annual payroll information laid out clearly in front of them, it becomes much easier to visualize the adjustments and savings they will need to put in place before retirement. That kind of personalized financial advice can be an important value-add for companies trying to attract quality new hires or reduce employee turnover.

What are payroll taxes?

The term "payroll tax" is a fairly broad concept that can mean a number of things depending on the specific laws of a particular place of employment. Generally speaking, though, it refers to a tax based on a percentage of an organization's overall employee that is paid by an employer to the state, local, or federal government. Common payroll taxes at the national level include withholdings for:
  • Federal income taxes
  • Federal unemployment taxes
  • Social Security taxes
  • Medicare taxes
Each of these taxes is assessed at a different tax rate. The employer is required to report all payroll tax deductions on their annual federal tax return. Additionally, both the employer and the employee must help support the Social Security Administration (SSA) by dedicating a portion of their respective federal payroll taxes to paying the Federal Insurance Contributions Act (FICA) tax. In the case of self-employed workers, such as freelance hires, the employee is responsible under the Self-Employment Contributions Act (SECA) for paying both the employer and employee portions of the tax. These payroll taxes also cover federal and state government unemployment insurance programs.

How reliable is a payroll calculator program?

As handy and helpful as an automated payroll simulation tool can be, it is important for employers and employees to remember that it is still a simulation. Even as the accuracy of this kind of software is constantly improving, the forecasts it produces are not guaranteed or legally binding. Employer who use a payroll calculator need to be aware that it should be used only for general guidance and estimates. Employers should always refer to an accountant, attorney, or other tax professional for serious tax or legal advice. Even in those cases, having a reasonable estimate of future payroll numbers ready at hand can provide a helpful guideline for financial professionals.

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Benefits administration

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