Losing an employee is a stressful situation that both employers and employees generally want to avoid. But the truth is most workers won't stay with you forever. At some point, you'll lose some of them.
The task at hand now becomes compensating them for the final hours they worked for you. And depending on your state, you may have a tight deadline to get it done.
So, how do you calculate the final paycheck for a salaried employee? We’ll cover all that and more, so let’s dive in!
Letting an employee go is never easy—no matter how experienced you are. Each case is unique, and various factors can make calculating the final paycheck a bit of a headache.
To make it easier for you, here’s a quick rundown of what to keep in mind while calculating your employee’s last paycheck:
Federal law doesn't regulate when you must pay the final paycheck for a salaried worker. However, various states have different regulations about when you should pay employees if they quit or get fired from your company.
Deadline for Giving Employees Final Paycheck
Tax Withholding on the Final Paycheck
When calculating your employee's take-home pay, you need to withhold the following tax deductions:
- Federal income taxes
- FICA taxes—Social Security and Medicare taxes
- State income taxes
The exact amount you withhold from the employee's paycheck will depend on how they filled out Form W-4—in other words, their total income, filing status, and the number of dependents.
If you also live in a city with local income taxes, those taxes will affect what the employee sees on their pay stub as well.
The good news is that if you're using payroll software like Hourly to issue paychecks, it’ll automatically adjust these payroll taxes for you.
Severance Pay and Unemployment Benefits
No law requires you to offer severance pay to employees leaving your company.
However, if the employee's contract says they should get severance pay when dismissed, you'll be legally obligated to honor those pledges. Failing to do so puts you at risk of a lawsuit for breach of contract.
Deducting Cost of Lost or Unreturned Property
The Fair Labor Standards Act (FLSA) prohibits employers from deducting lost, unreturned, or stolen items from the final salary of exempt workers. To be exempt, a worker should earn a minimum of $684 per week (at least $35,568 per year).
The best way to recoup the lost, unreturned, or stolen items is to either:
- Invoice the employee for the item's cost or take the issue to small claims court to get a legal judgment.
- Recover the loss through your business insurance.
However, for non-exempt workers, you can deduct the cost of the items, provided it doesn’t reduce the employee’s salary below the minimum wage or alter their overtime pay.
Still, states like California prohibit any deductions from an employee's final pay, regardless of whether they’re exempt or non-exempt.
Exempt vs. Non-Exempt Employees
According to the FLSA, exempt employees aren't entitled to overtime pay.
In contrast, FLSA regulations protect non-exempt employees, and you must pay them for overtime hours, which is time and a half for any hours worked over 40 or—for some states and industries—over 8 hours in a day.
How is an Employee’s Last Check Calculated?
Calculating how much you owe to hourly employees on their final paycheck is quite simple. You just multiply their hourly rate by the number of hours they worked before leaving your company, plus overtime pay.
For salaried employees, chances are slim their last day will fall exactly at the end of the pay period. So you'll prorate their salary like you do when calculating pay for an exempt employee who joins in the middle of the pay period.
With that in mind, here's how to calculate the final pay for salaried workers:
1. Calculate the Employee’s Daily Pay Rate
The calculation of the daily pay rate varies depending on the pay schedule you’re following.
If you’re using a weekly schedule, just divide the employee’s weekly pay by five (the number of days in a workweek). For example, if an employee earns $700 per week, their daily pay would be $140.
Or:
Weekly pay / 5 workdays = Daily pay
$700 / 5 workdays = $140 per day
To calculate the daily rate for the other pay schedules, convert the employee’s salary into annual (or yearly) pay by multiplying their paycheck by the number of pay periods in a year. Then, divide by 52 to get the weekly pay, and finally by five to get the daily pay.
In other words:
- Employee’s pay x number of pay periods = Annual salary
- Annual salary / 52 (number of weeks in a year) = Weekly pay
- Weekly pay / 5 (number of days in a workweek) = Daily pay
For monthly pay:
- Employee’s pay x 12 = Yearly salary
- Yearly salary / 52 = Weekly pay
- Weekly pay / 5 = Daily pay
For semimonthly pay:
- Employee’s pay x 24 = Yearly salary
- Yearly salary / 52 = Weekly pay
- Weekly pay / 5 = Daily pay
For biweekly pay:
- Employee’s pay x 26 = Yearly salary
- Yearly salary / 52 = Weekly pay
- Weekly pay / 5 = Daily pay
So if an employee earns $3,000 monthly, how do you calculate their daily pay?
- $3,000 x 12 = $36,000 (yearly salary)
- $36,000 / 52 = $692.31 (weekly pay)
- $692.31 / 5 = $138.46 (daily pay)
Their daily pay will be $138.46.
And if they earn $3,000 semimonthly, their daily pay will be $276.92:
- $3,000 x 24 = $72,000 (yearly salary)
- $72,000 / 52 = $1,384.62 (weekly pay)
- $1,384.62 / 5 = $276.92 (daily pay)
And if the $3,000 is their biweekly pay, their daily rate will be $300:
- $3,000 x 26 = $78,000 (yearly salary)
- $78,000 / 52 = $1,500 (weekly pay)
- $1,500 / 5 = $300 (daily pay)
2. Determine How Many Days the Employee Has Worked
After working out the employee's daily pay rate, all that's left to do is to multiply that figure by the number of days they've worked in the last pay period.
For example, if an employee earned $300 per day and worked for 20 days using a monthly pay frequency before calling it quits, their gross pay would be $6,000:
$300 x 20 days = $6,000
3. Deduct Payroll Taxes
Then just deduct payroll taxes, and you’ll get the employee’s final pay. Here's a quick reminder of the taxes you'll need to take out of their last paycheck:
- Federal income taxes
- FICA taxes—Social Security and Medicare taxes
- State income taxes
Now that you know everything there is to know about calculating the final paycheck for a salaried employee, all that's left to do is…
Evaluate the Final Paycheck to Comply With the Law
As you part ways with an employee, your work isn’t done just yet. Make sure to evaluate their final paycheck and pay what you owe to comply with labor laws.
Here are some things you need to check:
- Are there any special terms for final pay on the employment contract?
- Is there any outstanding accrued pay for time off or overtime?
- What time frame has your state given to pay the final paycheck?
Remember that complying with labor laws isn’t optional. An employee could sue you if you don’t pay them what’s due. For that reason, get legal counsel if you’re having challenges or concerns while calculating an employee's final net pay to avoid fines and problems later.
That said, parting ways with an employee doesn't mean harboring any ill feelings. Just keep things cordial and wish them luck in all their future endeavors. It's a nice gesture that can end your journey together positively.
