When you hire your first employee—or pay yourself from your business—you become responsible for payroll. That means it’s time to understand the numbers that go into an employee’s paycheck, including the difference between gross pay versus net pay. Therefore, to calculate your weekly earnings, you should divide your annual earnings by 52.
Prior to joining the team at Forbes Advisor, Cassie was a content operations manager and copywriting manager.
What is net pay?
For employees, it’s about knowing where your money is going and planning your finances accordingly. For employers, accurate deductions are key to maintaining compliance with tax laws and ensuring employee satisfaction. Misunderstandings or errors in deductions can lead to disputes, grievances, and potential legal issues. The what is the relationship between gross pay and net pay percentage of gross pay that goes to federal, state and local income taxes varies based on the person’s level of income and place of residence. However, federal FICA taxes are the same for everyone at 7.65% of gross pay. It is higher than net pay, which is the employee’s take-home pay after tax and benefit deductions.
To figure out your annual income, you must first do the math to find your weekly and monthly income. Currently, about 10 percent of employees in the U.S. owe wage garnishments, so it is not unusual to factor these in as an employer. These deductions are court mandated and deducted after all other mandatory deductions are made.
How to Maximize Net Pay
In other states like Colorado, child support payments are determined based on 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. FICA payroll taxes are 15.3 percent of your employee’s gross pay after the pre-tax deductions are accounted for.
Pre-tax deductions include certain health insurance premiums and 401(k). Simply put, 401(k) is a savings and retirement plan that workers contribute to from their wages. Make these deductions from the employee’s gross pay before calculating and withholding their payroll taxes—income dedicated to the voluntary deductions listed above are not taxed.