To improve the precision of small photoelectric encoders, a lot of research is conducted on the interpolation error correction method of moiré fringe photoelectric signals. A parameter equation of single channel signal waveform is built firstly, and then Fourier transform is performed on sampled signals to get the waveform parameters. The high spatial harmonics in the signal waveform are transformed into higher order components using the multiple angle formula, and photoelectric signals are corrected to standard sine and cosine ones using the Newton iteration method. After that, a phase error correction model of the sine and cosine signals is built, phase error correction parameters are then solved using the least squares fitting method, and finally the phase error correction of the photoelectric signals are realized. The interpolation error correction of a 16-bit small photoelectrical encoder is carried out. The result demonstrates that, it can effectively reduce interpolation error and improve the precision, which is important in the development of small and high-precision photoelectrical encoders.