HOW TO CALCULATE NET PAY FROM GROSS PAY

More often than not, in the preparation of the payroll of an organization, one or more questions arise. However, to avoid unnecessary issues while ensuring the smooth preparation of the payroll of an organization, it is advised that those in charge of preparing the payroll should seek help from adequate quarters, to avoid employee dissatisfaction, penalization from the tax office or payroll legislative issues. It is very common to see that people take net pay for gross pay or otherwise take them as synonyms, which they are not. You will find below a thorough explanation of how you can calculate the net pay from gross pay.

To start with, it is quite important that a distinction be made between ‘net pay’ and ‘gross pay’

What is Gross pay?

The term ‘gross pay’ refers to the total amount of money that is to be paid to an employee without any deductions. That is, the amount payable to an employee prior to deduction of taxes and other statutory dues.

What is net pay?

Net pay is the amount of money that is finally written on an employee’s check after all necessary deductions have been made from the gross pay.

It should be noted that the deductions from the gross pay of an employee includes: Federal, state and local taxes, Federal Insurance Contributions Act tax (FICA tax), which houses Medicare taxes and Social security taxes and so on.

An answer to the question “How can one calculate net pay from gross pay” could be simply represented in a formula:

Net pay = Gross pay – Deductions

ILLUSTRATION

So, let’s examine the case of a sample employee X, who works 50 hours a week and earns $15 per hour.

The gross pay for employee X would be: $15 multiplied by 50 which equals $750

Deductions

Assuming the FICA tax, which includes the Social security tax and Medicare tax is as follows:

  • Social security tax = 7.5% of the gross pay
  • Medicare tax = 2% of the gross pay
  • Social security tax of employee X = 7.5/100 multiplied by $750 = $56.25
  • Medicare tax of employee X = 2/100 multiplied by $750 = $15

Total FICA tax = $56.25 + $15 = $71.25

Assuming Federal tax = $80 per week, $80 is also deducted from the gross pay, as federal tax.

Assuming the state tax is 4.24%, state tax payable by employee X will be:

4.24/100 multiplied by $750 = $31.8

Assuming the health insurance tax per week is  $60. $60 is subtracted from the gross pay

Net pay:

Since the net pay has been said to be : Gross pay – Deductions

Where the gross pay of employee X is = $750

Deductions to be made:

  • FICA tax = $71.25
  • Federal tax = $80
  • State tax = $31.8
  • Health insurance = $60

Total deductions = $243.05

Net pay = $750 – $243.05 = $506.95

So, this net pay calculated would be the amount to be written on employee X’s pay check.

Read more here: https://study.com/academy/lesson/what-is-net-pay-definition-how-to-calculate.html