Paychecks and Taxes
Gross Pay
• The total amount of money earned before any
deductions are made.
– Calculated by taking the number of hours worked
times the hourly rate of pay.
– Example: 40 hours x $6.50 per hour = $260.00
Gross Pay
Deductions
• Amounts that are subtracted from Gross Pay to
pay for taxes, insurance and other items.
– Examples:
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Federal, State and Local Income Taxes
FICA (Social Security and Medicare Taxes)
Insurance
Retirement
Charities
Net Pay
• The amount left in your paycheck after all
deductions are taken out of the gross pay.
• This is the actual amount of your paycheck.
• Gross Pay – Deductions = Net Pay
Salary vs. Hourly Wages
• Salary-a set amount of pay that an employee
earns regardless of hours worked. Negotiated
when the person is hired.
• Hourly wages-amount per hour that an
employee works. Employee is only paid for the
number of actual hours worked.
– Overtime—for every hour worked over 40 hours
per week, the employee will earn 1 ½ times their
normal hourly wage.
Pay Periods
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Weekly—52 paychecks per year
Bi-weekly—26 paychecks per year
Semi-monthly—24 paychecks, usually 1st & 15th
Monthly—12 paychecks per year
Mandatory Deductions vs. Other
Deductions
• Mandatory deductions are required by law. All
employers must hold out these amounts for
taxes.
• Other deductions are made at the option of the
employee.
Tax Calculations
• Federal and State taxes are calculated by using
the tax tables. (schedules provided by the IRS)
The payroll clerk would need to know the
marital status, pay period and number of
exemptions for each employee to calculate these
taxes.
Federal Insurance Contributions Act
• Social Security and Medicare taxes, also known as
FICA, are calculated by taking a percentage of the
employee’s gross pay.
• Social Security is calculated by taking 6.2% of gross
earnings for each employee’s first $94,200 earned.
• Medicare is calculated by taking 1.45% of all earnings.
• Employers also pay a share of Social Security and
Medicare for each employee (Matching contributions)
W-4 Form
• Employees are required to complete this form
when they are hired for a job.
• The W-4 indicates how many exemptions the
employee will claim on his/her taxes.
• The number of exemptions claimed will effect
the amount of taxes withheld from the
employee’s paycheck.
• Exemptions may be claimed for yourself, your
spouse and your dependents.
Time Sheet
• Used to keep track of hours worked by an
employee.
• Employee keeps up with this and turns it in to
the employer each pay period.
• Employer uses this to calculate gross pay.
• Overtime hours are paid at 1 ½ times the
normal rate of pay.
• Other options are the use of a time clock or
computer to keep track of time worked.
Example of Time Sheet
• Standard work week is 40 hours, determined by
the Federal Labor Standards Act of 1938.
• Any hours worked over 40 hours is eligible for
the overtime rate (1.5 x hourly wage)
Reading a Paycheck Stub
• Includes information about current pay period.
– Number of hours worked, hourly or salary rate, net
earnings.
• Includes information about all deductions
• Includes year-to-date totals
• Includes basic information about the employee.
Employer’s Payroll Taxes
• The employer must deposit income tax withheld
and both the employee’s and employer’s Social
Security and Medicare taxes by mailing or
delivering a check, money order, or cash to an
authorized financial institution or Federal
Reserve Bank.
• Employers must match Social Security and
Medicare payments when issuing checks to the
government.
SUTA and FUTA Tax
• FUTA -- Federal Unemployment Tax Act
• SUTA -- State Unemployment Tax Act
• These two unemployment taxes do not affect the
paychecks of employees; they are entirely paid by the
employer.
• Provides for payment of unemployment compensation
to workers who have lost their jobs.
• FUTA tax rate is 6.2% of 1st $7,000 earned per
employee, with the 1st 5.4% being credit to the state
and .8% going to the Federal government.