Employers can either print checks from their bank or office supply store or use a payroll service that can handle check signing and mailing on their behalf.
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How to calculate net income
To determine net income:
- Start by subtracting any pre-tax contributions to benefits from the gross income.
- Withhold all relevant taxes, including federal, state, and local taxes.
- Deduct post-tax contributions to benefits if applicable.
- Apply any wage garnishments if required by law. The remaining amount is the employee’s net income.
How to calculate annual income
To calculate an employee’s annual salary, multiply the gross pay (before deductions) by the number of pay periods in a year. For instance, if an employee earns $1,000 per week, their annual income would be $1,000 multiplied by 52 weeks, equaling $52,000.
How to calculate taxes taken out of a paycheck
To calculate the taxes deducted from an employee’s paycheck:
- Reference their withholding certificates and current tax brackets to compute federal income tax.
- Calculate Medicare and Social Security taxes based on Federal Insurance Contribution Act (FICA) rates.
- Check for applicable state income tax and other local withholdings.
- Divide the total taxes by the gross income to determine the tax percentage deducted from the paycheck.
What is a paycheck?
A paycheck compensates employees for the work they perform. It’s typically issued on a weekly, bi-weekly or monthly basis, depending on the employer’s payroll schedule and state regulations.
Historically, employees received physical checks, either in person or by mail. Today, direct deposit into a bank account is more common. Additionally, some employers offer alternatives like paycards, which are particularly beneficial for employees who don’t have bank accounts.
How to read a paycheck?
Reading a paycheck is relatively straightforward. It’s essential to verify that the payment details, such as the amount and pay date, are correct.
Information Found on a Paycheck
A paycheck typically includes:
- Check number
- Employer and employee name and address
- Payment date and amount
- Employer’s bank account and routing numbers
- Optional check memo
Information Found on a Pay Stub
A pay stub provides a detailed breakdown of an employee’s earnings and deductions, often including:
- Pay period dates
- Hours worked
- Gross and net pay
- Federal, state, and local tax withholdings
- Deductions for benefits
- Wage garnishments
- Year-to-date totals
- Paid time off (PTO) balances Pay stubs may vary based on state requirements, which can mandate specific details or delivery methods.
Understand Paychecks: Withholdings and Deductions
Employees new to the workforce often wonder why their take-home pay is lower than their gross pay. This discrepancy is due to taxes, withholdings, and deductions.
Federal Income Tax Withholding
Federal income tax is withheld based on the employee’s Form W-4 and current tax rates. Employees can adjust their withholding by providing information about dependents, other jobs, or spousal income.
FICA Withholding
FICA taxes consist of two parts: 1.45% for Medicare and 6.2% for Social Security, paid by both the employee and employer. Social Security deductions stop after an employee earns $168,600 for the year. High earners may also face an additional 0.9% Medicare tax, which is only paid by the employee.
State and Local Tax Withholding
Taxes vary significantly by location, and some employees may face:
- State and local income tax
- State unemployment tax (SUTA)
- Short-term disability insurance
- Paid family medical leave deductions
Benefit Deductions
Employers who offer benefits like health insurance or retirement plans typically share the cost with employees. Contributions can be taken pre-tax or post-tax, with pre-tax contributions being more favorable as they lower taxable income.
Wage Garnishments
If an employer receives a court order, they may need to garnish wages to cover unpaid debts such as loans, taxes, or child support.
Is a pay stub the same as a paycheck?
Although paychecks and pay stubs are often provided together, they serve different purposes. A paycheck authorizes payment, while a pay stub provides a breakdown of how that payment was calculated.
What should a pay stub look like?
A typical pay stub includes details about how much an employee earned, taxes withheld, and deductions for benefits. Some states may require specific information to appear on pay stubs.
What should you do with your paycheck stub?
Employees can use pay stubs to verify payment accuracy and keep records for wage disputes. While employees aren’t required to save them, employers must retain payroll records for a specific time frame set by law.
What should you do if you don't receive your paycheck or your paycheck is late?
Contact the employer’s HR department to resolve any issues. Mistakes are often unintentional and can usually be quickly corrected.
How do I create a paycheck for an employee?
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