Explicit instruction on deduction types and net pay calculation
Introduction: The Deduction Menu
When Sarah runs payroll, two things happen simultaneously: the employee takes home less money, and the employer pays more than just the gross wage. Let's map every deduction and calculate both numbers.
Employee Deductions (Subtracted from Gross Pay)
- Federal Income Tax Withholding - Based on W-4 elections and tax brackets
- Social Security Tax - 6.2% of gross (capped at wage base)
- Medicare Tax - 1.45% of gross (no cap)
- State Income Tax - Varies by state rules
- Other voluntary deductions - Health insurance, retirement (401k), etc.
Employer Payroll Expenses (Added to Gross)
- Employer Social Security - Matches employee 6.2% (capped)
- Employer Medicare - Matches employee 1.45% (no cap)
- Federal Unemployment (FUTA) - 6% on first $7,000
- State Unemployment - Varies by state (typically 0-5%)
Gross Pay - Employee Deductions = Net Pay (Take-Home)
Net Pay = Gross Pay - Federal Tax - Social Security - Medicare - State Tax - Other
Note: Social Security and Medicare are sometimes called "FICA" (Federal Insurance Contributions Act).
Given: Alex's bi-weekly gross pay = $2,000. Single, no adjustments on W-4.
| Calculation | Amount |
|---|---|
| Gross Pay | $2,000.00 |
| - Federal Income Tax (estimated) | -$220.00 |
| - Social Security (6.2%) | -$124.00 |
| - Medicare (1.45%) | -$29.00 |
| = Net Pay | $1,627.00 |
Alex takes home $1,627, not $2,000. Sarah must withhold $373 total for taxes.
Now let's calculate what TechStart actually pays for Alex:
| Calculation | Amount |
|---|---|
| Gross Pay (wages) | $2,000.00 |
| + Employer Social Security (6.2%) | +$124.00 |
| + Employer Medicare (1.45%) | +$29.00 |
| = Total Employer Cost | $2,153.00 |
Key Insight The employer pays $2,153 for an employee who takes home only $1,127 bi-weekly. That's a 7.65% markup!