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Gross Pay can be thought of as the Big Brother or Big Sister of Net Pay.
Gross Pay is always there to protect the Net Pay if the big bad expenses try to bully him or her.
Ok, bad metaphor aside. Calculating gross pay is extremely important for keeping accurate records of money earned and spent.
Below we go a little bit deeper…
The exempt or salaried employee is paid gross pay based on the amount of her annual salary divided by the number of pay periods in a year, usually 26. For example, a salaried employee who makes $40,000 per year is paid by dividing that $40,000 by the number of pay periods in a year. In the example, the employee would receive 26 paychecks that each total $1,538.46. Any reimbursements, bonuses, or other payments would also be added to gross pay.
In addition to the required payroll deductions for taxes, Medicare, and Social Security, the employer also subtracts voluntary deductions from an employee’s gross pay. Voluntary deductions to gross pay can include such items as charitable contributions and the employee’s contribution to the employer’s health care insurance coverage. Any court-ordered garnishment, whether voluntary or required by law, is also subtracted from an employee’s gross pay.
The resulting paycheck, after all of the required and voluntary deductions are subtracted, is called net pay. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
Net pay is the total amount of money that the employer pays in a paycheck to an employee after all required and voluntary deductions are made. To determine net pay, gross pay is computed based on how an employee is classified by the organization. An hourly or nonexempt employee is paid by the hours worked times the agreed-upon hourly rate of pay.
The nonexempt employee’s paycheck may also include payment for overtime, bonuses, reimbursements, and so forth. The salaried or exempt employee is paid an annual, agreed-upon salary, usually in bi-weekly payments. The amount of the paycheck is determined by the total annual salary divided by the number of pay periods in a year, normally 26.
From this total pay which is known as gross pay, the employer is required by law to withhold certain percentages of an employee’s paycheck to pay required tax withholdings. After voluntary payroll deductions are subtracted and legally required payroll deductions are subtracted, the pay that the employee receives is called net pay.
Understanding Employee Deductions
In all cases, to calculate the employee’s net pay, the amount to subtract from gross pay is determined by using the number of deductions declared by the employee on the W-4 form. These are used in conjunction with the tax charts provided by the Internal Revenue Service (IRS). The employee’s total number of deductions are determined by the number of immediate family members.
A single employee can take one deduction. A married employee with two children can take four deductions. The key is to pay enough in taxes without overpaying. When an employee overpays, the government can freely use the employee’s money until the employee fills out an income tax return to get his refund from the IRS.
In addition to the required payroll deductions for taxes, Medicare and Social Security, the employer also subtracts voluntary deductions from an employee’s gross pay. Voluntary deductions from gross pay include items such as charitable contributions (for example, United Way), disability insurance, extra life insurance, and the employee’s required contribution to healthcare insurance coverage.
Any court-ordered garnishment is also subtracted from an employee’s gross pay. Simply put, net pay is whatever is left over from an employee’s pay after all legally required and voluntary deductions are subtracted.
Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
Calculating Gross Pay
Gross pay is simpler to calculate than net pay. To calculate gross pay for an hourly employee, an employer will need to know the employee’s hourly rate and how many hours they worked during the pay period. This information can easily be entered into PaycheckCity’s hourly calculator, and the hourly calculator will calculate the gross pay based on the hourly rate and number of hours worked. Other hourly pay types can include commission, tips, and overtime. For additional hourly pay types, an employer would need to click “Add Rate” under “Rates Information.” For instance, if an employee is paid $10 per hour and works 40 hours during the pay period, their gross pay is calculated by multiplying their pay rate of $10 per hour by their hours worked, which is 40 for a gross pay of $400. Now let’s assume this employee worked 5 hours of overtime during the pay period and they are paid time and a half for overtime. To calculate the gross pay based on the overtime rate and hours, 5 hours is multiplied by the $15 overtime rate totaling $75 gross pay for the overtime hours worked. The total gross pay for the period would be the $400 plus $75 totaling $475.
To calculate a salaried employee’s gross pay, the employee’s annual salary is divided by the number of pay periods in a year. The number of pay periods in a year is determined by the pay frequency. If a salaried employee’s pay frequency is semi-monthly, then there are 24 pay periods in the year. Typically, for an employee paid bi-weekly, there are 26 pay periods. However, during leap years, like 2020, there are 27 pay periods. A weekly pay frequency can be affected by the leap year, and in some situations, the customary 52 pay periods per year increase to 53.
To calculate the gross pay for a salaried employee with an annual salary of $52,000 paid weekly, the $52,000 annual salary is divided by 52 pay periods resulting in a $1,000 gross pay for the pay period. Now suppose this employee is paid on a semi-monthly basis. The annual salary of $52,000 is divided by 24 pay periods totaling $2,167 per pay period.
Calculating Net Pay
Calculating net pay is not a straightforward calculation like gross pay is. To calculate an employee’s net pay, pre-tax deductions, payroll taxes, and post-tax deductions are subtracted from the gross pay. The type of deductions and payroll tax rates often vary from employee to employee based on their individual W-4 elections and where they live, making the calculation complex.
To calculate the net pay of the hourly employee referenced above, we will use the PaycheckCity hourly paycheck calculator.
Based on the pay and personal information entered in the hourly calculator, we see that the net pay is $281.40 from the gross pay amount of $475.00.
Gross Pay and Net Pay and Paychecks
A paycheck should always include the gross pay amount and the net pay amount. This information helps an employee understand how much they earned and how much they received. But, how can an employer explain to them where the rest of their earnings went?
The first deduction listed under paycheck results is federal withholding. Federal withholding is based on the information an employee submits on their Form W-4. Information such as federal filing status, the number of allowances, and additional federal withholding determine how much money is deducted from each paycheck. However, the new Form W-4 determines this amount based on different information. The 2020 Form W-4 requires information such as federal filing status, dependents amount, other income, deductions, and additional federal withholding. With our dual scenario calculator, you can compare income based on the 2019 Form W-4 versus the 2020 Form W-4, or you can run other scenarios to see how different federal withholding choices affect the take-home pay.
The next deductions are social security and Medicare. Together these two make up the FICA tax, the Federal Insurance Contributions Act tax. Both the employer and the employee pay these taxes. Social Security is paid at a rate of 6.2 percent, which equates to 12.4 percent in total when you combine the employer and employee contributions. Medicare is paid at a rate of 1.45 percent from the employee and employer, which totals 2.9 percent.
The last deduction usually listed on a paycheck is the state tax. While some states don’t have state income tax rates, others can get as high as 13 percent. Florida, Texas, and Washington are among the few that do not have state income tax rates. California, Hawaii, and New Jersey are among the highest at over 10 percent.
Other taxes that can commonly be listed as a deduction are local taxes, school district taxes, and more. By using your address when calculating your paycheck, you can determine if there are additional taxes for your area that will be deducted from your paycheck.
Gross Pay and Net Pay Overview
While gross pay is important to a manager, net pay is essential to an employee as this is the take-home pay. The PaycheckCity net pay calculator can help anyone determine what their take-home pay will be based on their salary or hourly rate and hours worked. To calculate gross wages based on your most recent paycheck, you can use the PaycheckCity gross-up calculator. This calculator will ask you for the same information as the salary calculator, including deductions, filing status, and additional withholding; however, by using the net pay on your paycheck, you can determine the gross pay.