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Managerial Accounting: Types of Responsibility Centers

Determining Net Pay for Employees in Your Business

Net pay is the amount a person is paid after subtracting taxes and benefits. So, after all deductions are subtracted from an employee’s gross pay, you are left with the net pay. After you figure out all the necessary taxes to be taken from an employee’s paycheck, you can calculate the check amount.

Here’s the equation and an example of how you calculate the net pay amount:

Gross pay – (Social Security + Medicare + Federal withholding tax + State withholding tax + Local withholding tax) = Net pay

For example:

$1,000 – (62 + 14.50 + 148 + 45 + 0) = $730.50

This net pay calculation doesn’t include any deductions for benefits. Many businesses offer their employees health, retirement, and other benefits but expect the employees to share a portion of those costs. The fact that some of these benefits are tax deductible and some are not makes a difference in when you deduct the benefit costs.

If an employee’s benefits are tax deductible and taken out of the check before federal withholding taxes are calculated, the federal tax rate may be lower than if the benefits were deducted after calculating federal withholding taxes. Many states follow the federal government’s lead on tax deductible benefits, so the amount deducted for state taxes will be lower as well. For example, the federal government allows employers to consider health insurance premiums as nontaxable, so the states do so also.

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