How to Calculate Net Pay | Step-by-step Example

Employee wage : \$ 50,000 a year. But you know that ’ s not what they ’ ra walking away with. Between taxes and benefit deductions, the employee ’ s take-home yield could be far from the \$ 50,000 spine price ( cue the sad violin ). To find their take-home pay up, you need to know how to calculate net pay .
After all, you want to run an accurate and legal payroll to avoid penalties and fees, and share of that requires you to know the gross to net calculation. Read on for the follow :

1. The difference between gross pay vs. net pay
2. How to calculate net pay
3. Gross to net example

The difference between gross pay vs. net pay

Understanding the difference between gross and net wage is the inaugural dance step to learning how to get net from gross .
here ’ s how it works. An employee starts out with their gross give. But after taxes and other deductions, they walk away with their web give. Take a look at the breakdown below.

What is gross pay?

Gross pay is an employee ’ second income before taking out deductions. Unless you gross-up an employee ’ second wages, gross pay is normally the “ poser price ” you offer .

What are deductions?

To calculate net from gross, you must withhold deductions each yield time period. There are both tax and non-tax deductions. And, some deductions are compulsory while others are voluntary .
Taxes are mandatary. You may need to withhold the following from an employee ’ mho gross pay :

• Federal income tax
• Social Security tax
• Medicare tax
• State income tax, if applicable
• Local income tax, if applicable
• Other state-specific taxes

Some non-tax deductions are mandatary, excessively. If you need to withhold these types of deductions, the appropriate agency notifies you. Examples include :

• Garnishments
• Child support payments

voluntary deductions ( i.e., benefits ) include :

• Retirement plan contributions
• Flexible spending account (FSA) contributions
• Health savings account (HSA) contributions

What is net pay?

net income wage is the take-home pay an employee receives after you withhold payroll deductions. You can find net pay by subtracting deductions from arrant pay up .

How to calculate net pay

so, how is web pay calculated ? Think of calculating net pay like a childlike mathematics trouble. And like all mathematics problems, there ’ s a net give recipe you need to know about :
Net Pay = Gross Pay – Deductions
To calculate net pay for your employees, you need to be able to answer three questions :

1. What are the employee’s gross wages for the pay period?
2. How much are taxes?
3. How much are non-tax deductions?

1. What are the employee’s gross wages for the pay period?

How you find an employee ’ south crude wages for the give period may depend on whether they are compensated or hourly .
by and large, a compensated employee earns the same come in gross wages each yield menstruation ( unless they ’ re eligible for overtime pay ). An hourly employee ’ s gross give depends on the count of hours they work during the pay period .
Want to find a salaried employee ’ s crude pay each pay frequency ? Divide their annual wage by their pay frequency :

• Weekly: 52
• Biweekly: 26
• Semi-monthly: 24
• Monthly: 12

Want to find an hourly employee ’ s gross pay each pay up frequency ? Multiply the employee ’ s hourly pay by the number of hours worked during the yield period .

2. How much are taxes?

Determining tax withholding requires some extra calculations and work. Some taxes are flat rates while others use tax tables .
Social Security and Medicare taxes make up FICA tax. The FICA tax pace is a flat percentage of 7.65 % that you hold from each employee ’ randomness wages. Of this 7.65 %, 6.2 % goes toward Social Security tax and 1.45 % goes toward Medicare tax. Keep in mind that there is a social Security engage base and extra Medicare tax, if applicable .
Federal income tax withholding varies. The amount you withhold depends on the employee ’ s :

• Pay
• Form W-4 information
• Filing status (e.g., Single)

Use each employee ’ sulfur W-4 form and the union income tax withholding tax tables in IRS Publication 15 to figure out how much the employee owe in federal income taxes .
State and local income taxes vary by department of state and vicinity. Check with your state for more information .
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3. How much are non-tax deductions?

You besides need to determine whether to hold extra money for employee benefits and other non-tax deductions. Keep in take care that some of these deductions are pre-tax while others are post-tax .
If an employee has a pre-tax deduction, subtract the measure from their wages before you figure out some or all of their taxes. This lowers their taxable income. Examples of pre-tax deductions include health indemnity premiums, some retirement plans, and life indemnity premiums .
If an employee has a post-tax tax write-off, withhold the measure after you ’ ve figured out their taxable income. Examples of post-tax deductions include Roth retirement plans and engage garnishments .

Gross to net example

Want to see how to calculate net pay from arrant pay in action ? Let ’ s say your employee, Pam, is a single-filer support in Ann Arbor, Michigan.

Pam makes \$ 20 per hour and works 40 hours per workweek. You pay her weekly, so her sum gross is \$ 800 ( \$ 20 X 40 hours ). She does not work overtime .
Pam has health policy. Her wages are national to federal income, FICA, and state income tax. Ann Arbor does not have local income tax .
To go from gross to net, foremost forecast her deductions. then, subtract the deductions from her crying wages .

1. Calculate the deductions

First up : calculate Pam ’ second tax and non-tax deductions. Because her health indemnity premium is a pre-tax deduction, withhold it before calculating taxes .

Pam ’ s health insurance bounty is \$ 50 per week. Health benefits are exempt from Social Security, Medicare, and income tax withholding .
Subtract the \$ 50 from Pam ’ s arrant wages first :
\$ 800 – \$ 50 = \$ 750
Pam has \$ 750 in taxable crying wages .

FICA tax

To determine how much of Pam ’ s paycheck goes toward FICA tax, multiply her wages after the pre-tax health deduction ( \$ 750 ) by 7.65 % .
\$ 750 X 0.0765 = \$ 57.38
Withhold \$ 57.38 in FICA tax from Pam ’ s gross pay .

Federal income tax

Pam has a 2020 or later Form W-4 on file and uses the standard withhold. thus to find federal income tax withhold, use the wage bracket method tables for manual payroll systems with Forms W-4 from 2020 or late in Publication 15-T .
Pam ’ s \$ 750 taxable wages fall between \$ 745 – \$ 755. Using the engage bracket method acting tables, you find that her federal withholding is \$ 56 each week .

State income tax

Michigan has a flat department of state income tax rate of 4.25 %. Multiply \$ 750 by 4.25 % :
\$ 750 X 0.0425 = \$ 31.88
Withhold \$ 31.88 from Pam ’ s gross wages for state income taxes .

Local income tax

Ann Arbor does not have local income taxes. Do not deduct anything from Pam ’ s megascopic pay up for local income taxes .

2. Subtract deductions to find net pay

To calculate web give, deduce FICA tax ; federal, department of state, and local income taxes ; and health policy from the employee ’ s crude yield .
Using the recipe to calculate net give, determine the employee ’ second net pay .
net Pay = Gross Pay – Deductions
here ’ s a summation of the withholding amounts we calculated :

• Gross Pay = \$800
• Health Insurance Premium = \$50
• FICA Tax = \$57.38
• Federal Income Tax = \$56
• State Income Tax = \$31.88
• Local Income Tax = \$0

net Pay = \$ 800 – \$ 50 – \$ 57.38 – \$ 56 – \$ 31.88
final Pay = \$ 604.74

This article has been updated from its master publication date of 10/19/2016 .