Total Earnings (Gross Pay) – Pre-tax Withholdings – Taxes + Reimbursements = Amount Deposited (Net Pay)
For a more comprehensive understanding of the process, here are the following steps:
1. Compute the employee's gross income for the specific pay duration. This encompasses:
- Base Salary
- Tips Received
- Commission Earned
- Any Applicable Overtime
2. Deduct pre-tax contributions, which commonly encompass:
- Premiums for Health Insurance
- Health-related Account Deductions (e.g., FSA)
- Contributions towards Retirement Plans (e.g., 401k or 403b)
- Assistance for Childcare and similar expenses
The remaining balance after pre-tax deductions constitutes taxable wages. It's important to note that the definition of taxable wages can vary depending on the type of taxes involved.
3. Subtract employee-specific taxes, including:
- Federal Income Tax
- State Income Tax
- Local Taxes (City and Regional)
4. Reduce other relevant taxes that both employees and employers contribute to. These may involve:
- Social Security
- Medicare
- Contributions for Paid Family and Medical Leave
5. Account for additional post-tax deductions, whether voluntary or involuntary. These could include:
- Wage Garnishments as mandated by court orders (e.g., child support)
- Charitable Donations
- Contributions to a 529 Savings Plan
6. Factor in reimbursements. These are integrated after tax deductions since they don't constitute earned income. Reimbursements are a repayment owed to employees for expenses incurred in relation to their work responsibilities.
7. The resultant sum represents net pay, signifying the actual amount the employee receives.