Payroll Calculations: Distinguishing Between Gross Pay and Net Pay

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It seems like it should be simple to calculate payroll for an employee, and most new business owners assume that they can handle payroll in-house. But, without an experienced bookkeeper or accountant to help with the payroll calculations, you may be running the risk of missing critical payroll deductions.

Mark Rowley, OwnerRandR Payroll Services

Mark Rowley, Owner
RandR Payroll Services

Gross Pay vs. Net Pay

Payroll calculations aren’t as simple as multiplying the hourly wage by the number of hours that are worked for a given pay period. This calculation will give you the gross payment amount. Gross weekly compensation for a salaried employee is calculated by dividing the annual salary by 52 weeks (26 weeks for bi-weekly pay periods).

The employee’s base pay is different from the take-home pay, so you will need to know the difference before a check is cut. After calculating gross pay, the next step is to calculate the deductions that need to be withheld. This net pay calculation is the amount of money that the employee will take home after the deductions are withheld.

Payroll Deductions

How much should you deduct from each paycheck? These deductions include the current rates for federal, state, and local employment taxes. For example, you will need to withhold a certain percentage for the Federal Insurance Contributions Act (FICA), Medicare, and Social Security taxes. Then, you will need to send the payments to the appropriate government offices.

Other payroll deductions might include health insurance, retirement accounts, or any additional benefits for the employee. In some cases, it is also necessary to withhold garnishments because of court orders for unique situations.

Simplest Payroll Processing Solutions

It can be a hassle to calculate payroll by hand. Not only do you increase the risk that mistakes will be made, but manual payroll processing also takes a lot of time. Instead of using your valuable time for payroll management, it is better—and likely cheaper–to outsource these tasks to a professional team. By freeing up your time, you can focus on revenue generating activities.

The fastest and easiest way to calculate payroll for your company is to call our team at R&R Payroll & Bookkeeping Services. We specialize in small business services, and we are here to help: (951) 296-0412.