Short answer: paycheck software for small business takes the hours each employee worked, calculates gross pay including overtime, subtracts pre-tax deductions, income tax withholding, Social Security, Medicare and other deductions, and produces net pay and a pay stub. The math is automatic; the part you control is giving it accurate, approved hours.
Most small business owners do not want to become payroll experts. They want paychecks that are right, on time, every time. This guide walks through how a paycheck is built, what to look for in paycheck software and how to make sure the hours behind every paycheck are correct.
Try it: build a paycheck
Drag the sliders to see how hours, overtime and taxes turn gross pay into take-home pay.
Paycheck estimator: gross to net
Drag the sliders and watch the paycheck split into take-home pay, taxes and deductions.
Simplified estimate. Overtime is 1.5 × the rate. FICA is 7.65% of gross wages (some pre-tax deductions are also exempt from FICA). Real federal withholding depends on Form W-4 and IRS tables; enter your own percentages. Not tax advice.
How a paycheck is calculated, step by step
- Hours worked. Regular and overtime hours for the pay period, taken from approved timecards.
- Gross pay. Regular hours times the hourly rate, plus overtime at one and a half times the regular rate for hours over 40 in a workweek under the FLSA, plus tips, bonuses or commissions. Some states, such as California, also have daily overtime.
- Pre-tax deductions. For example certain retirement or health plan contributions.
- Taxes withheld. Federal income tax based on the employee’s Form W-4 and IRS tables, Social Security (6.2% up to the annual wage base), Medicare (1.45%), and state and local income taxes where they apply.
- Post-tax deductions. Such as garnishments or after-tax benefits.
- Net pay. What lands in the employee’s account, shown on the pay stub with every line explained.
What to look for in paycheck software
- Accurate tax tables for federal, state and local taxes, updated automatically.
- Overtime and multiple pay rates for employees who work different jobs.
- Direct deposit and pay stubs employees can view on their phone.
- Simple import of hours from your time clock.
- Pricing that fits a small team, without surprise fees for extra runs or year-end forms.
- Support you can reach on payday.
The paycheck is only as accurate as the hours
Paycheck software cannot know that someone forgot to clock out, worked through lunch or picked up an extra shift. Those mistakes come from time data and show up as wrong paychecks. The fix is a simple routine before every payroll:
- Flag and correct missed punches the same day.
- Watch overtime during the week with labor rule alerts, not after it happened.
- Approve timecards before the payroll cutoff.
- Export approved hours instead of retyping them. If something slips through, follow our guide to correcting an approved timecard.
Where EZTime fits
EZTime is not paycheck software. It is the time and attendance system that feeds it: employees clock in from the mobile app, NFC tags or a kiosk, managers approve hours and fix exceptions in one place, and you export payroll-ready hours, overtime and PTO to the paycheck software you use. Right hours in, right paychecks out.
See EZTime with your own team
Leave your details and a US team member will reach out, or start your free 14-day trial right away. Plans start at $2 per employee per month.
Frequently asked questions
What does paycheck software do?
Paycheck software calculates gross pay from hours or salary, withholds taxes and deductions, and produces net pay, pay stubs and payments. Most paycheck software is part of a broader payroll system that also handles employer taxes and filings.
How is an hourly paycheck calculated?
Gross pay is regular hours times the hourly rate plus overtime hours at one and a half times the regular rate (for hours over 40 in a workweek under federal law). Then pre-tax deductions, federal income tax withholding, Social Security, Medicare, state and local taxes and other deductions are subtracted to get net pay.
What percentage is taken out for Social Security and Medicare?
Employees pay 6.2% Social Security tax on wages up to the annual wage base and 1.45% Medicare tax on all wages, for a combined 7.65%. An additional 0.9% Medicare tax applies to wages over $200,000. Employers pay a matching 7.65%.
How is federal income tax withholding determined?
It depends on the employee’s Form W-4, pay frequency and wages, using the IRS withholding tables in Publication 15-T. Payroll software applies these tables automatically.
Do I need paycheck software for a small team?
Not strictly, but calculating withholding and overtime by hand is time-consuming and error-prone. Even small teams usually save time with payroll software fed by approved hours from a time clock.
This article is general information for US employers, not tax or legal advice. Tax rates, wage bases and state rules change; confirm current figures with the IRS, your state agency or a payroll professional.