Calculating Your Take Home Pay
Home much pay is headed to your bank account? You need to know your take home pay amount to plan your personal finances, and the amount you’re paid depends on a number of factors- some of which you control.
Your first step is to complete Form W-4.
Complete Form W-4
The Employee’s Withholding Allowance Certificate (Form W-4) is a form that the federal government requires employees to fill out when they are newly hired. Information submitted on the form (allowances) lets employers know how much salary to withhold from a paycheck for tax purposes.
Keep these points in mind:
- Employers should keep each worker’s most current W-4 form in his or her payroll file. The IRS may request a copy of the form.
- The employer enters the number of allowances into the payroll processing system, which is how tax withholdings are calculated.
The W-4 collects the worker’s basic information (name, address, filing status) and provides guidance for employees who have multiple jobs, or who have working spouses. There are extra resources provided to calculate withholdings for these situations.
The more allowances your list, the higher your tax withholdings will be. For example, a worker with five dependents typically withholds more than a single taxpayer. When the dependents are included on the tax return, they lower the tax liability. The single taxpayer with no dependents does not have the same level of deductions.
There are other factors that impact the take home pay calculation.
Information Used to Calculate Take Home Pay
This data helps determine take home pay:
- Payroll cycle: The number of pay periods determines how much salary is paid on each payroll date. It also determines the start and ending days for computing hourly payroll.
- Gross pay: Wages may be based on a salary, or calculated using an hourly rate of pay.
- Tax withholdings: Federal, state, and possibly local amounts withheld for taxes. The number of allowances you choose, and your annual gross pay, determine the amount of taxes withheld.
- Benefit withholdings: Amounts withheld for the employee’s share of insurance premiums, or funds to be invested in a retirement plan.
Here’s a simple example to help you visualize the process.
Calculating Take Home Pay: An Example
Sally’s annual income is $60,000, and your firm processes payroll 26 times a year. Sally’s gross wages each pay period total ($60,000 / 26), or $2,308 per pay period.
Based on the allowances on her W-4, your company should withhold 20% of her gross pay ($462) for federal taxes, and 5% ($115) for state taxes. Sally also pays $50 each pay period for her share of the company health insurance plan.
Sally’s net pay is $2,308, less a total of $577 for taxes, and $50 for her health insurance premiums. Her net pay is $1,681.
The pay stub must include all of this information for the current payroll period and year-to-date. Hourly workers can review detail on their total hours worked, and any hours that are paid as overtime wages.
Understanding Your Pay Stub
A pay stub lists all of the key information related to your pay. The pay stub provides information on wages, tax withholdings, and benefit withholdings.
Employees should keep their most recent pay stubs as proof of income. If an individual applies for a loan, the pay stub confirms the borrower’s gross income. Employers should keep pay stubs on file, if they are generated.
The pay stub information should match the data on each employee’s W-2 form, which individuals used to file their personal tax returns.
If you work as a freelancer or independent contractor, the employer doesn’t withhold amounts for taxes or benefits. You need to add the gross pay to total income on your tax return, and set aside dollars for federal and state income taxes.
Do you understand how your take home pay is calculated?