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Frequently Asked Questions on Payroll Tax Calculator
What is Gross Pay?
Gross pay refers to an employee's total earnings before any taxes or deductions are withheld by the employer.
What is Gross Pay YTD?
Gross Pay Year-to-Date (YTD) represents the total earnings an employee has received from the beginning of the current calendar year up to the present, without accounting for any deductions or taxes.
What is Net Pay and How do you calculate it?
Net pay is the take-home pay an employee receives after you withhold payroll deductions. You can find net pay by subtracting deductions from gross pay. To calculate Net Pay, subtract the total Taxes and Benefits/Deductions from the Gross Pay using the formula:
Net Pay = Gross pay - Taxes - Benefits/deductions.
Still Confused Between Gross Pay and Net Pay?
Generally, Gross pay and Net pay appear in every paycheck and are considered to be the most important factors in the payroll process. Learn More about Gross Pay and Net Pay
What’s the difference between a deduction and withholding?
Withholdings refer to the amounts taken from every employee's paycheck to cover income taxes for the specific pay period. On the other hand,
payroll deductions are amounts taken from the employee’s paycheck for specific benefits and chosen contributions, such as retirement, healthcare, or special funds. While withholdings are mandatory for tax obligations, deductions are often voluntary and based on the employee's chosen benefits or
charitable contributions.
How to calculate Annual Income?
To calculate an annual salary, multiply the gross pay (before tax deductions) by the number of pay periods per year.
For example, if an employee earns $3,000 per month, the individual’s annual income would be 3,000 x 12 (month) = $36,000.
The employee's annual income is $36,000.
What is Pay Frequency?
Pay frequency, also known as payroll frequency, refers to how often an employer disburses payments to its employees. The pay frequency is an essential aspect of the payroll process and can vary based on the company's policies. Here are some common pay frequency periods:
Weekly
- Employees are paid every week.
- This results in 52 paychecks per year for the employees.
Biweekly
- Payments are made every other week on a set weekday, such as every Friday or Thursday.
- Employees receive two paychecks per month, but there are two months in a year when they receive three paychecks instead of two. This means employees will receive 26 paychecks per year.
Semimonthly:
- Employees are paid on the same two days every month, often on the 1st and 15th or the 15th and the last day of the month.
- Unlike biweekly pay periods, semimonthly pay periods occur 24 times in a year, and there are no months with three pay periods.
Monthly
- Payments are made every month, resulting in 12 paychecks per year.
- Typically, employees are paid on the last day of the month or the first day of the month following the payroll.
Want to Determine the Pay Schedule for Your Business?
Choosing a suitable pay schedule for your business is crucial to ensure a smooth payroll process. Click here to understand how to choose the payroll schedule for your business.
How is pay frequency used to calculate payroll?
Understanding the pay frequency is important as it helps to determine the employee’s gross pay. For instance, let's consider an employee with an annual salary of $60,000:
Weekly Pay Frequency : Gross Pay = $60,000 / 52 (weeks in a year) = $1,154
Monthly Pay Frequency : Gross Pay = $60,000 / 12 (months in a year) = $5,000
In this example, the pay frequency, whether weekly or monthly, affects the amount of gross pay calculated for each pay period. Employers use this information to structure and distribute paychecks accurately based on the established pay frequency.
How can I determine my eligibility for exemption from federal taxes?
Generally, you are exempt from Federal taxes if your income is lower than the tax threshold. For the 2023 tax year, the tax threshold is as follows:
- Single filer: $13,850
- Joint filers: $25,900
- Head of household: $20,800
In case you are 65 or older or blind, the tax threshold may vary please check the IRS publication 505 for current law.
How is Federal Income Tax calculated?
Federal Income Tax is calculated by withholding a portion of income from every individual, business, or legal entity. This withholding applies to various forms of income, including wages, tips, bonuses, and gambling winnings.
The calculation of Federal income taxes relies on information provided through Form W-4 and Year-to-Date (YTD) data. Employers use these details to establish Federal withholding tax rates for their employees. Specifically, the information on Form W-4, completed by individuals, guides employers in determining the appropriate amount of tax to be withheld from each paycheck.
Year-to-date figures provide a comprehensive overview of the cumulative income and taxes withheld from the beginning of the year.
The Internal Revenue Service (IRS) has outlined the applicable tax rates in IRS Publication 15-T. For the tax year 2024, rates are 0%, 10%, 12%, 22%, 24%, 32%, 35%, or 37%.
What is Form W-4?
Form W-4, Employee's Withholding Certificate, is a document completed by employees in the United States to indicate their tax withholding preferences to their employers. The purpose of the W-4 form is to provide information to employers so they can calculate the appropriate amount of federal income tax to withhold from an employee's paycheck.
What is FICA tax?
The Federal Insurance Contributions Act ( FICA tax) is a payroll tax in the United States that mandates both employers and employees to contribute a specific percentage of wages to fund Social Security and Medicare programs.
Social Security Taxes
For the 2023 tax year, the total Social Security tax rate is 12.4%. Both employee and employer are required to contribute 6.2% each.
There's a maximum wage base for Social Security taxes on earnings, above which no tax is levied. For the 2023 tax year, the maximum social security wage limit is $160,200. This means only the first $160,200 of your earnings are subject to the Social Security tax. For 2024, the maximum social security base limit has been set to be $168,600.
Medicare Taxes
In addition to Social Security, FICA includes the Medicare tax. The Medicare tax rate for the 2023 tax year is 2.9%, with both the employee and employer contributing 1.45% each. Unlike Social Security, there are no wage limits for Medicare taxes.
However, there is an additional 0.9% tax on top of the standard 1.45% Medicare tax for those who earn over $200,000 (single filers) or
$250,000 (joint filers).
