Employee Payroll Calculation: How to Calculate Salary, Allowances, and Deductions

What is Payroll Calculation?

Payroll calculation (Payroll Calculation) is the monthly process aimed at determining the final amount each employee deserves for their work during a specific period. This process is not limited to just adding numbers; it includes reviewing contracts, matching data with Qiwa contracts, and ensuring compliance with the Wage Protection System.

Simply put, what is payroll calculation? It is a mathematical and legal process that combines:

• Basic salary and allowances (earnings).
• Deductions and withholdings (insurance, absences, loans).
• Bonuses and overtime (additions).

Then it produces the net salary that is transferred to the employee’s account.

Why is accurate payroll calculation important in 2026?

• Digital Integration: Any discrepancy between the calculated salary and the Qiwa contract is recorded as a violation.
• Impact on Nitaqat: The compliance rate in salary disbursement is calculated within Nitaqat criteria.
• Financial Penalties: Errors in social insurance may lead to fines reaching SAR 10,000.
• Employee Rights: Any shortfall in salary is considered a violation of the Saudi Labor Law.

Employee Salary Components

Before starting employee payroll calculation, you must understand the basic components that make up the salary. These components are divided into three main categories:

First: Earnings

Second: Deductions

Third: Special Additions

• Overtime: Work hours outside official working hours.
• Assignment Allowance: Additional amounts for tasks outside the worksite.
• Advance End-of-Service Rewards: In some companies (uncommon).

How to Calculate Basic Salary and Allowances

The method for calculating an employee’s salary begins by determining the total earnings before any deductions. Here is the correct method:

Step 1: Basic Salary

The basic salary is the backbone of the salary. It is determined based on:

• The contract registered on the Qiwa platform.
• The approved salary scale within the company.
• The minimum wage in Saudi Arabia (SAR 4,000 for Saudis in the Nitaqat program).

Step 2: Housing Allowance

The housing allowance is calculated based on one of two methods:

• Fixed percentage: 25% of the basic salary (most common).
• Fixed amount: Agreed upon in the contract (example: SAR 1,500 monthly).
• Actual housing: If the company provides housing, the allowance is recorded as zero.

Step 3: Transportation Allowance

The transportation allowance is usually calculated as a fixed monthly amount ranging between SAR 300 to SAR 1,000 depending on the company’s policy and job level.

Practical Example for Calculating Earnings:

How to Calculate Deductions

After determining earnings comes the real stage of employee payroll calculation: deducting legal and administrative deductions. This stage requires the utmost precision because any error may affect the employee’s rights or cause a violation for the establishment.

1. Social Insurance Deduction (GOSI)

For Saudi employees:

• Employee’s share: 9.75% of total wage (basic salary + housing allowance).
• Establishment’s share: 11.75% of total wage.

For expatriate employees:

• Establishment’s share only: 2% of total wage (work injury insurance).
• The expatriate employee is not deducted from their salary for insurance.

2. Absence Deduction

Absence deduction is calculated based on actual working days per week, not 30 days:

• For administrative employees (5 days): Working day = Total salary ÷ 21.75
• For field employees (6 days): Working day = Total salary ÷ 26

Absence Deduction Formula:

Absence Deduction = (Total Salary ÷ Monthly Working Days) × Number of Absence Days

3. Lateness Deduction

Lateness is calculated either:

• By hour: Working hour = Basic salary ÷ (Daily working hours × Monthly working days)
• By partial day: Some companies consider 3 hours late = half day absence.

4. Loan Deduction

The monthly loan installment is deducted according to the written agreement between the employee and the company. The deduction must not exceed 50% of the net salary except in exceptional cases.

Deductions Summary Table:

Calculating Absence and Lateness Days

Employee payroll calculation requires special precision in processing absences and lateness, because any error here directly affects the employee’s rights and may be considered a violation of labor law.

Types of Absence and How to Calculate Them:

How to Calculate Lateness:

1. Determine Daily Working Hours Let’s assume an administrative employee works 8 hours daily, 5 days a week. Total monthly working hours = 173 hours (21.75 days × 8 hours).
2. Calculate Hourly Value Hourly value = Basic salary ÷ 173. Example: 8,000 ÷ 173 = SAR 46.24 per hour.
3. Apply Lateness Policy If lateness is 30 minutes or less: may be excused. If more: deduction is calculated per internal policy.
4. Maximum Deduction Limit According to labor law, no more than one full day (8 hours) may be deducted in one day due to lateness.

Calculating Overtime

How to calculate employee salaries including overtime requires precise knowledge of Saudi laws. Overtime is defined as any work performed outside official working hours.

Overtime Rates According to Saudi Labor Law:

Maximum Overtime Limit:

• Overtime must not exceed 720 hours annually per employee.
• Written approval must be obtained from the employee before requesting overtime.
• Overtime hours must be recorded in the attendance system.

Comprehensive Practical Example:

Let’s assume a Saudi employee with the following specifications:

• Basic Salary: SAR 8,000
• Housing Allowance: SAR 2,000
• Transportation Allowance: SAR 800
• Overtime on regular days: 10 hours
• Overtime on rest day: 4 hours

Calculation:

Steps to Prepare the Final Employee Salary

After understanding all components, here is the final method for calculating an employee’s salary step by step:

1. Sum Fixed Earnings Add basic salary + housing allowance + transportation allowance + any other agreed allowances. This gives you gross salary.
2. Add Positive Variables Add overtime + bonuses + commissions + any other additional amounts due to the employee this month.
3. Calculate Insurance Deductions Calculate 9.75% of (basic salary + housing allowance) for Saudi employees. For expatriates: 0%.
4. Calculate Absence and Lateness Deduction Use attendance data to calculate absence days × daily work value + lateness hours × hourly value.
5. Deduct Loans and Obligations Add monthly loan installment + any other administrative deductions (maximum 50% of net salary).
6. Calculate Net Salary Net Salary = (Total Earnings + Additions) – (Insurance + Absence + Lateness + Loans)
7. Final Review Compare the result with the Qiwa contract. Ensure net salary is not less than 50% of gross salary. Verify data matches GOSI.

Common Payroll Calculation Errors

Avoiding these errors ensures employee payroll calculation without legal or financial problems:

Frequently Asked Questions About Payroll Calculation