How to Calculate Gross Pay to Net

how to calculate gross pay

When you receive a job offer, your new employer will likely advise you of the salary or hourly wage you’ll be earning. This compensation amount, however, is your gross pay, and doesn’t accurately reflect how much you’ll receive in each paycheck, which is referred to as your net pay. You can calculate this difference between gross and net pay by determining the amount of various payroll deductions you’re subject to.

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Involuntary Tax Withholding

There are certain taxes that neither you nor your employer can avoid deducting from your gross pay. The federal government requires your employer to withhold 6.2 percent of your gross pay for Social Security taxes, and 1.45 percent for the Medicare tax. If your gross pay is above a certain level, federal income tax must be withheld as well. You do have some control over the amount of federal income tax withheld by increasing the number of allowances you claim on the W-4 form you must fill out when you start a new job. If the state or municipality you live or work in charges income tax, your employer will have to withhold for this tax too.

Other Involuntary Payroll Deductions

If union membership is a condition of your employment, union dues may have to

be deducted from your gross pay. Additionally, if you have unpaid child support payments that a court requires to be paid from your wages, your employer has to withhold money from your paycheck until the court advises that it’s no longer necessary. Similarly, having unpaid debts that result in a wage garnishment, such as for defaulted student loans, also come out of your gross pay until the debt is completely paid off.

Voluntary Payroll Deductions

When starting a new job, you may be offered an array of elective benefits that you pay for out of each paycheck. These benefits commonly include premiums for health insurance coverage and dental care, contributions to retirement accounts, life insurance, U.S. savings bonds purchases, and even goods and services you purchase from your employer, for example. These payroll deductions are considered voluntary since you can generally pick and choose which benefits, if any, to elect.

Pre-Tax and After-Tax

A number of voluntary deductions, such as for medical insurance and 401(k) contributions, are considered pre-tax, in that they reduce the amount of taxable income reported on your W-2 at the end of the year. Others, like for the purchase of goods from an employer, are treated as after-tax deductions -- meaning your taxable income isn’t influenced by the deduction.

Source: ehow.com

Category: Bank

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