Taking a look at your paycheck, you'll notice several deductions from your gross pay, leaving you with less money. The remaining amount is your net pay or take-home pay. To arrive at your take-home pay, you'll have to calculate a series of taxes, including federal income taxes, Federal Insurance Contributions Act tax, or FICA, state and local taxes. If you participate in a 401(k) plan, deduct this amount from your pay too. Other deductions include medical and life insurance premiums. Once you understand the deductions, you'll be able to calculate your take-home pay.
Calculate gross pay. This is the amount of money earned before tax deductions. If an employer pays on an hourly basis, gross pay is the hourly rate multiplied by the number of hours worked. For example, if the hourly rate is $21 and hours worked totaled 40 for the week, gross pay is $840. If pay is on a salary basis, divide the annual salary by the frequency of payments. For example, if an employee earns an annual salary of $45,000 and the employer pays every other week, the gross pay for the pay period is $1,730.77: $45,000 divided by 26.
Calculate federal income tax withholding allowance. This is based on your IRS Form W-4, Employee's Withholding Allowance Certificate. The form tells your employer how much income tax to withhold from your paycheck. The more allowances you claim on the W-4, the less income tax your employer withholds from your pay. Table 5 of IRS Publication 15 allows you to calculate withholding using the percentage method. Given biweekly pay of $1,730.77, for example, a single person claiming two allowances as of 2012 would deduct $292.30 ($146.15 x 2) for one withholding allowance.
Subtract the withholding allowance from the gross pay. In this example, the portion of the paycheck subject to withholding is $1,438.47 ($1,730.77 - $292.30).
Locate the income tax withholding table that corresponds to the pay schedule. In this case, the biweekly pay period table shows that for wages subject to withholding that are over $417 but not in excess of $1,442, the employer must withhold $33.40 plus 15 percent of the amount in excess of $417. Since the taxable wage of $1,438.47 falls within this range, deduct a total of $186.62 (($33.40 + (15 percent x ($1,438.47 - $417)). The result is $1,251.85 ($1,438.47 - $186.62).
Calculate and deduct FICA taxes. In 2012, the employee FICA tax contribution is 5.65 percent, which breaks down to 4.2 percent for Social Security tax and 1.45 percent for Medicare tax. Your employer pays the remaining portion of 13.3 percent FICA tax (6.2 percent for Social Security and 1.45 percent for Medicare). Multiply the Social Security tax rate of 4.2 percent by the gross pay amount. Using the example, this amounts to $72.69 ($1,730.77 x 4.2 percent). Multiply the Medicare tax rate of 1.45 percent by the gross pay amount to arrive at a tax amount of $25.10 ($1,730.77 x 1.45 percent). Deduct the FICA tax of $97.79 from gross pay.
Deduct state and local taxes as they apply. If you make 401(k) contributions or pay medical insurance premiums, deduct these amounts as well. It is not uncommon for your employer to deduct your 401(k) contributions on a pretax basis, which helps you to keep more money in your pocket since less of your pay is subject to income tax. What this means is that you'll have to deduct the 401(k) contribution first before calculating federal income tax.
Items you will need
- basic calculator
- In 2012, the maximum salary taxable earnings limit for Social Security tax is $110,100. This means that once you've earned this amount, your employer no longer deducts Social Security taxes from your pay. You'll still have to pay Medicare tax. The salary limits and FICA contributions are subject to change.
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