- Paycheck deductions can be obligatory or voluntary, such as tax withholdings vs. retirement savings
- Net pay is calculated differently for salaried employees and hourly employees
- It is important to have records of your employees’ gross and net pay
An employee’s net pay, or their take-home pay, refers to their final earnings received after all deductions are withheld. Deductions include obligatory and voluntary withholdings such as:
- FICA Taxes (Social Security or Medicare)
- Federal, State, or Local Income Tax
- Retirement Plan Savings
- Health Insurance Premiums
- Optional Insurance Premiums (including Vision, Dental, Life, Accident, etc.)
- Flexible Spending and Dependent Care Accounts
- Health Savings Accounts
- Wage Garnishments
- Union Dues
Gross Vs. Net Pay
Gross pay refers to an employee’s earnings before deductions are withheld. For example, an employee can make $10,000 a month, but have $2,000 to pay in taxes and deductions. Therefore, they would take home $8,000 a month.
How To Calculate Net Pay
To know how much money an employee earns per paycheck after deductions, calculate their net pay. In order to do so, the following information is useful:
- Gross pay amount
- Tax filing status, dependents, and adjustments on form W-4
- Other payroll deductions
For hourly employees, gross pay is calculated by multiplying hours worked in a pay period with the hourly wage of that employee. If an employee makes $20 an hour for 40 hours a week, they would have earned $800 that week before deductions.
For salaried employees, gross pay is calculated by dividing the annual salary by the number of pay periods per year. If an employee is paid biweekly, then an their annual salary would be divided by 26.
The following are the basic steps to calculating an employee’s net pay:
- Subtract pre-tax contributions like health and dental benefits
- Calculate and deduct income taxes
- Calculate and deduct payroll taxes
- Garnish wages if necessary
Why is it Important to Know your Employees’ Net Pay?
Employers need to have accurate knowledge at their fingertips for the following reasons:
Often times an employee will wonder about their paycheck, as deductions can be significant. An employer must be able to explain what the deductions are and why they are withheld.
Net pay, among other payroll records, can help employers with accounting decisions and budget decisions, like altering company benefits. It will also help an employer understand what to withhold from an employee’s pay, as well as how to match their benefits.
Understanding the difference between gross pay and net pay will help employers ensure compliance with payroll rules and regulations. Employees may claim that they are not being paid their full earnings. Employers must have records of employees’ gross and net pay in order to dispute these claims.
To better understand payroll taxes and compliance, click here for the SentricHR Payroll guide!
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