Subtract the FICA rate from the gross pay to have the correct amount for calculating taxable income. These deductions reduce your taxable income, lowering the taxes you need to pay and increasing your net pay. For mandatory tax deductions, employees must fill out which of the following equations calculates net pay? a financial document known as a Form W-4. As an employer, the form lets you know the correct tax amount you need to withhold from your employee’s paycheck. Suppose David, a software developer, has just joined a renowned company, and his annual salary is $50,000.

This means you take out a voluntary deduction from your employees’ payroll before calculating mandatory taxes. Pre-tax deductions lower your employee’s taxable income and payroll taxes. To calculate gross pay, you have to take your employee’s total annual salary and divide it by the number of pay periods within that year.

Form W-4

Revenue refers to total profits and cash inflows from various sources of income. These sources can include investments, donations, liquidation of assets, or revenue from selling goods or services. This is known as your top line because it is the first entry on an income statement.

• Understanding the difference between gross and net pay is the first step to learning how to get net from gross.
• The income tax rate depends on the tax bracket and filing status of the employee.
• The usual deductions are FICA and other taxes, contributions to health insurance or life insurance and any federal debt.
• Depending on an employee’s marital status, dependents and gross pay, he or she might be allowed to pay taxes over a smaller gross pay.
• CTC is the total cost of the employee to the company and does not represent the amount the employee will receive in their paycheck.
• This is a form that an employee fills out for the employer to determine how the deductions from gross pay should be calculated.

An after-tax voluntary deduction example is the fee contributed to a labor union. FICA is an involuntary pre-tax deduction and alimony payments are an after-tax involuntary deduction. Do not deduct anything from Pam’s gross pay for local income taxes. Net pay is the take-home pay an employee receives after you withhold payroll deductions.

Reduce Labor Costs

A pay period refers to the time frame you’re paying your employees for. There are several types of pay periods based on how many times employees are paid within a year. For an individual, net income (or net pay) refers to the actual pay received after factoring taxes and deductions. Gross pay deductions go towards federal and state taxes and certain social insurance programs like Medicare or Social Security. Since net income is your bottom line, it’s an important metric that helps measure business health and performance. It shows you the amount of money you can use to funnel back into business operations, distribute to shareholders, pay debts, or save until needed.