Question

Your manager, Charlene Hayes, has asked you to prepare a memo outlining the steps to calculate a net pay. The information will be used in training new employees in the Payroll Department, so be as detailed as possible. Point form is acceptable for ease of reading.

Answer 1

Steps for calculating net pay:

• Start with gross pay: for calculating the net pay, the first step would be to start with the gross pay. Gross pay is the amount that is owed to the employee for a given period. Gross pay for salaried employees is the salary for the entire year divided by number of periods in the year.
• Deduct federal income tax withholding: these taxes are withheld based on the information provided in W-4. It contains the following:

• The employee’s marital status that includes the head of household designation.
• The employee’s filing status whether single, married, joint or married filing single
• Any additional withholding that is designated by the employee.

        The tax bracket & the filing status are used to determine the federal withholding tax for the pay period. These things are added with the additional withholding to get the total amount that is withheld from the employee’s pay check.

The withholding amount for a specific pay period starts with gross pay and the type of pay period. Then the employee's marital status and the number of exemptions are included in the calculation, along with any additional amounts the employee wishes to have withheld.

• Deduct any state & local withholding: this is little tricky because each state have their own rules & policies on payroll withholding. There is a chart by bureau of labor statistics for calculating the state income tax withholding. Some states have reciprocity agreements, meaning that they do not tax out-of-state income. For example, an employee who works in Iowa and who is a resident of Illinois does not have to pay Iowa income tax on his or her wages. Check this list of reciprocity agreements.
• Withhold FICA taxes: this is the combination of OASDI & Medicare tax. The formula for calculating the FICA tax is gross pay times the employee portion of tax. It must also be ensured that employee’s total gross pay for that year doesn’t exceed social security maximum for that year & it must also be noted when an employee’s wages reach the amount for additional Medicare tax.
• Any other additional voluntary deductions: there are number of voluntary deductions that are possible. This would include health plan premiums, garnishments, charitable deductions etc.