Lesson 1.3 · Unit 1 · N-Q.1-3
From the pay you earn to the pay you receive
The amount deposited in a bank account is almost never the amount earned. The difference is a list of deductions, some required by law and some chosen, and reading that list is a skill. It tells you where the money went and, more usefully, which deductions you control.
- Net pay is gross pay minus all deductions. Gross is what was earned; net, or take-home, is what is deposited.
- Required deductions are federal income tax withholding, state income tax withholding, Social Security, Medicare and, in California, State Disability Insurance (SDI).
- Voluntary deductions are choices: a retirement contribution, a health insurance premium, a union due, a charitable gift.
- Pre-tax deductions reduce taxable wages. A 401(k) contribution and an employer health premium are taken out before income tax is figured, so income tax is computed on a smaller number.
- Payroll taxes treat them differently. A health premium under an employer plan is also exempt from Social Security and Medicare tax. A 401(k) contribution is not: it still pays those taxes.
- The year-to-date column (YTD) is the running total for the calendar year. It should equal the current amount times the number of checks so far, if nothing changed.
- The percent of gross that reaches you is net divided by gross times 100.
- Check the stub. Deductions plus net must equal gross. If they do not, a line was misread or misadded.
Where students lose marks: treating every deduction as coming off the same amount. Income tax is figured on wages after pre-tax deductions, and Social Security and Medicare on a different amount. Name the base for each line before you compute it.
The problem. A biweekly check has gross pay of \$1,850.00. The worker contributes 5 percent to a 401(k) and pays \$48.00 for employer health insurance. In this problem federal withholding is 12 percent and state withholding 4 percent of taxable wages, Social Security is 6.2 percent and Medicare 1.45 percent, and SDI is 1.1 percent of gross. Find the net pay and the percent of gross received.
Step one: find the pre-tax deductions. The 401(k) is \( 0.05 \times 1850 = 92.50 \). The health premium is \$48.00.
Step two: find the income tax base. Both are pre-tax, so taxable wages are \( 1850.00 - 92.50 - 48.00 = 1709.50 \).
Step three: income tax withholding. Federal: \( 0.12 \times 1709.50 = 205.14 \). State: \( 0.04 \times 1709.50 = 68.38 \).
Step four: find the payroll tax base. The health premium is exempt but the 401(k) is not, so these taxes apply to \( 1850 - 48 = 1802 \).
Step five: payroll taxes and SDI. Social Security: \( 0.062 \times 1802 = 111.72 \). Medicare: \( 0.0145 \times 1802 = 26.13 \). SDI, on gross: \( 0.011 \times 1850 = 20.35 \).
Step six: total the deductions. \( 92.50 + 48.00 + 205.14 + 68.38 + 111.72 + 26.13 + 20.35 = 572.22 \).
Step seven: subtract for net pay. \( 1850.00 - 572.22 = 1277.78 \). Percent of gross received: \( \dfrac{1277.78}{1850} \times 100 = 69.07 \) percent.
Step eight: check and interpret. Net plus deductions is \( 1277.78 + 572.22 = 1850.00 \), which equals gross. About \$140.50 of the deductions are not taxes at all: the 401(k) contribution and the health premium are the worker's own choices, and the contribution is saving rather than spending.
Problems 1 to 5 are routine. Problems 6 to 10 are multi-step or ask for reasoning.
- Gross pay is \$2,100.00 and total deductions are \$540.00. Find the net pay.
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\( 2100 - 540 = 1560 \). \$1,560.00
- Name two deductions that are required by law and two that are voluntary.
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Required: any two of federal income tax, state income tax, Social Security, Medicare and (in California) SDI. Voluntary: any two of a retirement contribution, health insurance premium, union dues and a charitable gift. See the lists
- A worker contributes 6 percent of a \$1,500.00 gross check to a 401(k). Find the
contribution.
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\( 0.06 \times 1500 = 90 \). \$90.00
- Net pay is \$1,200.00 on a gross of \$1,600.00. What percent of gross is received?
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\( \dfrac{1200}{1600} \times 100 = 75 \). 75 percent
- A check is the ninth of the year, and the current Medicare deduction is \$24.00. What
should the year-to-date Medicare column show if nothing has changed?
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\( 9 \times 24.00 = 216.00 \). \$216.00
- A check has gross pay of \$1,600.00 and a \$40.00 pre-tax health premium, with no other
pre-tax deduction. Federal withholding is 10 percent of taxable wages. Find the federal
withholding.
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Taxable wages are \( 1600 - 40 = 1560 \), and \( 0.10 \times 1560 = 156.00 \). \$156.00
- On the same check, find the Social Security tax at 6.2 percent, given that the health
premium is exempt from payroll tax.
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The payroll tax base is \( 1600 - 40 = 1560 \), and \( 0.062 \times 1560 = 96.72 \). \$96.72
- Two workers each earn \$2,000.00 gross. One contributes 5 percent to a 401(k) and the
other contributes nothing. Income tax withholding is 12 percent of taxable wages. How much
less income tax is withheld from the contributor, and does her take-home fall by the full
\$100 contribution?
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The contribution is \( 0.05 \times 2000 = 100 \). Her taxable wages are \$1,900, so her withholding is \( 0.12 \times 1900 = 228 \), against \( 0.12 \times 2000 = 240 \). That is \$12 less income tax. Her take-home therefore falls by \( 100 - 12 = 88 \) dollars rather than \$100, since the tax saving offsets part of the contribution. \$12 less tax; take-home falls by \$88
- A stub shows gross \$1,200.00, deductions of \$150.00, \$75.00, \$60.00 and \$40.00, and
net pay of \$880.00. Decide whether the stub is consistent.
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Total deductions are \( 150 + 75 + 60 + 40 = 325 \). Then \( 1200 - 325 = 875 \), not 880. The stub is off by \$5, so a line was misprinted or misread. Deductions plus net must equal gross. Not consistent: off by \$5
- A student says, "My raise from \$1,400 to \$1,500 gross a check means I take home \$100
more." Explain the error.
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The extra \$100 of gross is also subject to income tax, Social Security, Medicare and SDI. If those total 25 percent of each additional dollar, the take-home rises by \( 100 \times 0.75 = 75 \) dollars. The raise is always worth less than its gross amount, but it is never negative. Take-home rises by less than \$100, about \$75 at 25 percent