Gross pay is computed based on how an employee is classified by the organization. An hourly or nonexempt employee is paid by multiplying the total number of hours worked by an hourly rate of pay. The non-exempt employee’s paycheck may also include payments for overtime time, bonuses, reimbursements, and so forth. In a simple example, Simon works 40 hours in a 5-day week, 8 hours per day. His hourly rate is $15.00 per hour. If no bonuses or other payments are provided this week, his gross pay for the week, before deductions, is $600.00.
Gross Pay
The exempt or salaried employee is paid gross pay based on the amount of her annual salary divided by the number of pay periods in a year, usually 26. For example, a salaried employee who makes $40,000 per year is paid by dividing that $40,000 by the number of pay periods in a year. In the example, the employee would receive 26 paychecks that each total $1,538.46. Any reimbursements, bonuses, or other payments would also be added to gross pay. The resulting paycheck, after the required and voluntary deductions, are subtracted, is called net pay. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
Net Pay
Net pay is the total amount of money that the employer pays in a paycheck to an employee after all required and voluntary deductions are made. To determine net pay, gross pay is computed based on how an employee is classified by the organization. An hourly or nonexempt employee is paid by the hours worked times the agreed-upon hourly rate of pay. The non-exempt employee’s paycheck may also include payment for overtime, bonuses, reimbursements, and so forth. The salaried or exempt employee is paid an annual, agreed-upon salary, usually in bi-weekly payments. The amount of the paycheck is determined by the total annual salary divided by the number of pay periods in a year, normally 26.
Understanding Employee Deductions
In all cases, to calculate the employee’s net pay, the amount to subtract from gross pay is determined by using the number of deductions declared by the employee on the W-4 form. These are used in conjunction with the tax charts provided by the Internal Revenue Service (IRS). The employee’s total number of deductions are determined by the number of immediate family members. A single employee can take one deduction. A married employee with two children can take four deductions. The key is to pay enough in taxes without overpaying. When an employee overpays, the government can freely use the employee’s money until the employee fills out an income tax return to get his or her refund from the IRS. Any court-ordered garnishment is also subtracted from an employee’s gross pay. Simply put, net pay is whatever is leftover from an employee’s pay after all legally required and voluntary deductions are subtracted. Because the US tax laws are confusing, you might also want to talk with your state Department of Labor and/or an employment law attorney when you venture down the road of first hiring employees. Your business accounting firm is also another expert in matters relating to payroll taxes and deductions.
