Direct instruction on Gross and net pay calculations including all standard withholdings with clear examples and business context
How Each Deduction Gets Calculated
Before we touch Excel we need clean mental math. Every deduction you saw on Alex's paystub follows a very specific rule. When you know the rule, building the spreadsheet is easy.
Before calculating any deductions, Sarah must know the gross pay. Here's the scoreboard she'll track for every employee:
Sarah's cash requirement: Net Pay ($1,597.82) + Employer Cost ($171.36) = $1,769.18 per bi-weekly period for Alex alone.
Federal income tax comes from the IRS tax tables. We subtract the standard deduction, figure out the taxable wages for the pay period, then see which bracket the wages fall into. Alex filed his W-4 as single with no dependents, so we use the "single" bracket.
State income tax depends on the state. TechStart operates in California, so Sarah uses a temporary 4% starter rate until her full state worksheet is finished. In Lesson 03 you'll build the official California lookup table using SUMIFS and validation rules.
Social Security is always 6.2% of taxable wages until the annual wage base hits $172,800. If Alex earns $2,240 during the pay period, the Social Security withholding is $138.88. Sarah matches that same amount as an employer expense.
Medicare is 1.45% of every dollar Alex earns. There is no cap. Once Alex earns more than $200,000 in a calendar year, an additional 0.9% employee surtax kicks in. We won't hit that this week, but your Excel model should plan for it when Sarah hires higher-paid staff.
2025 IRS Federal Tax Tables
Tables pulled from IRS Rev. Proc. 2024-40 (tax year 2025). Use the table that matches the employee's filing status, find the correct range, then apply the formula listed in the third column.
| Rate | Taxable income range | IRS formula |
|---|---|---|
| 10% | $0 – $11,925 | 10% of taxable income |
| 12% | $11,925 – $48,475 | $1,192.50 + 12% of the amount over $11,925 |
| 22% | $48,475 – $103,350 | $5,578.50 + 22% of the amount over $48,475 |
| 24% | $103,350 – $197,300 | $17,651 + 24% of the amount over $103,350 |
| 32% | $197,300 – $250,525 | $40,199 + 32% of the amount over $197,300 |
| 35% | $250,525 – $626,350 | $57,231 + 35% of the amount over $250,525 |
| 37% | $626,350 – and up | $188,769.75 + 37% of the amount over $626,350 |
Alex's taxable wages (after standard deduction) sit inside the 12% bracket until the simulator shows higher annual income.
| Rate | Taxable income range | IRS formula |
|---|---|---|
| 10% | $0 – $23,850 | 10% of taxable income |
| 12% | $23,850 – $96,950 | $2,385 + 12% of the amount over $23,850 |
| 22% | $96,950 – $206,700 | $11,157 + 22% of the amount over $96,950 |
| 24% | $206,700 – $394,600 | $35,302 + 24% of the amount over $206,700 |
| 32% | $394,600 – $501,050 | $80,398 + 32% of the amount over $394,600 |
| 35% | $501,050 – $751,600 | $114,462 + 35% of the amount over $501,050 |
| 37% | $751,600 – and up | $202,154.50 + 37% of the amount over $751,600 |
Use this table when employees update their W-4 to married status or when Sarah models her own salary with a spouse.
| Rate | Taxable income range | IRS formula |
|---|---|---|
| 10% | $0 – $17,000 | 10% of taxable income |
| 12% | $17,000 – $64,850 | $1,700 + 12% of the amount over $17,000 |
| 22% | $64,850 – $103,350 | $7,442 + 22% of the amount over $64,850 |
| 24% | $103,350 – $197,300 | $15,912 + 24% of the amount over $103,350 |
| 32% | $197,300 – $250,500 | $38,460 + 32% of the amount over $197,300 |
| 35% | $250,500 – $626,350 | $55,484 + 35% of the amount over $250,500 |
| 37% | $626,350 – and up | $187,031.50 + 37% of the amount over $626,350 |
Head of household covers single parents supporting dependents. The bracket thresholds are more generous than the single table.
Filing status changes everything. If Alex updates his W-4 to married filing jointly with two dependents, the withholding jumps to the married table plus expanded child tax credits. The bi-weekly taxable amount drops because the standard deduction doubles to $30,000 per year. Sarah needs your simulator to switch tables instantly when employees update their forms.
- Standard deduction doubles · 30,000
- Child credits reduce federal withholding even before refund time.
- Spreadsheet must store filing status so formulas know which table to query.
- Start with gross pay (hours × rate) for the pay period.
- Subtract pre-tax benefits if they exist (health premiums, retirement contributions).
- Apply Social Security (6.2%) and Medicare (1.45%) to the taxable wages.
- Use the correct IRS tax table row to find federal withholding.
- Apply the state rate or table.
- The remainder is net pay. Add employer-side FICA on top for Sarah's cash planning.
Complete each sentence before moving on to the guided calculator.