It’s a gross fact of life that what’s considered your annual gross salary isn’t the amount of money you receive each year. Wouldn’t it be great if it was that simple? Everyone would seem to be a lot richer at least! However, as an employee, your earnings may be subject to different types of taxes and a variety of other deductions. To know what you can afford to spend and how much you may be able to save, calculating your salary after taxes is necessary.
At first, it may seem intimidating to figure out the fine details that go into whittling down the cash you earn. Nevertheless, it is a pretty straightforward process when you just take it step by step. Also, it is understanding those calculations that can help you see how you may be reaping rewards from the taxes and other deductions as well. Your base salary before or after taxes is probably going to be quite different.
Determine Your Gross Annual Income
First, figure out your gross annual salary. If you’re an hourly employee, that can vary quite a bit since you earn a set amount per hour and may work different hours. Hourly employees may also get overtime if they work over 40 hours per week, and some may be only part-time employees whose hours vary weekly. It’s a misconception that hourly employees always make less money. If a job includes a lot of overtime, an employee may be much better off if he receives hourly pay with overtime pay.
If you’re an hourly employee, multiply your hourly wage by the number of hours you worked in a specific pay period. If they vary greatly, this may not help much with long-term planning, but it is something you can do each week before figuring out how much you earn after deductions. That way, you can more easily discern what will be on your paycheck. If you know how many hours you’ll work each week, it’s easy to figure out your earnings for future pay periods. For example, if you have an hourly rate of $14 and you work 40 hours each week, you can expect your gross earnings to be $560 per pay period if you’re paid weekly or $1,120 per pay period if you are paid every other week.
What does an annual salary mean for salaried employees? Well, they typically have a set salary and aren’t given overtime pay. If you’re on a regular salary, it’s easy to calculate your gross earnings per pay period. Simply divide your annual salary by the number of pay periods in the year. For example, if you’re paid twice per month, you’d divide that by 24. If you are paid each week, you’d just divide it by 52. If you’re paid monthly, divide it by 12, and so on.
Subtract Non-Tax Deductions
Next, subtract your pretax deductions. Make sure you don’t lump all deductions together because pretax deductions lower the amount of your taxable wages, while after-tax deductions have no impact on how much tax is taken from your pay. There’s no need to look at your after-tax deductions here.
Things such as health insurance, accident insurance, life insurance, flexible spending accounts, child care assistance programs and health savings account contributions typically qualify as pretax deductions. Some transportation programs that reimburse employees for parking or public transportation may also be considered pretax benefits to be deducted.
Some of these deductions may lessen your wages for income tax. Other deductions will reduce how much of your income is taxable for Medicare and Social Security taxes. While your pretax payroll deductions may be significant, keep in mind that these may ultimately be even more valuable than take-home pay, and they’re typically done for things that are for the employee’s benefit.
Do not typically subtract contributions you make to a 401(k) or other employer-sponsored retirement plan before figuring out taxes unless they are specified pretax 401(k) contributions. Just keep in mind that not all pretax benefits are never taxed. For example, if you do have pretax 401(k) contributions, they may be taxed later when you cash in on the retirement account.
After all the pretax benefits have been deducted, the result is your gross salary that is then subject to being taxed.
Consider Medicare and Social Security
The next step you need to take is figuring out how much in Medicare and Social Security taxes you’ll be responsible for paying. These are considered Federal Insurance Contributions Act taxes. They are comprised of the old age, survivors and disability insurance taxes (Social Security taxes) and the hospital insurance taxes (Medicare taxes).
Multiply the Medicare and Social Security combined rate percentage by your gross salary that’s subject to being taxed in order to calculate these taxes. The combined rate for both 2017 and 2018 is 7.65 percent.
These combined Medicare and Social Security taxes are flat-rate taxes, which means they’ll be the same no matter how much you earn for each pay period. However, additional Medicare taxes may be applied to an employee’s Medicare wages that exceed a threshold amount. Employers must withhold a 0.9 percent Medicare tax on the person’s wages when the person is paid over $200,000 in a year. This withholding starts during the first pay period when the employee’s wages exceed $200,000 for the year and continue each pay period until the end of the calendar year.
Only the Social Security tax has a wage-based limit. For 2018, the base wage is $128,400. No amount that’s earned over $128,400 will be subject to Social Security taxes. No wage-based limit applies to the Medicare tax.
Factor in Your Retirement Plans
Next, subtract the contributions you make to employee-sponsored retirement plans, such as a 401(k) plan, from your gross salary that’s subject to being taxed. These contributions may not be subject to income tax withholding, but Social Security and Medicare taxes do apply. So, they will need to be subtracted from the calculation after your Social Security and Medicare taxes are determined.
Subtract Your Federal Income Tax
Now it’s time to subtract federal income tax withholding. Obtain a pay stub to see if your W-4 withholding allowance is listed on it. You’ll need information about your W-4 withholding allowance in order to calculate your federal income tax withholding. Your W-4 form provides information such as your Social Security number, marital status, number of allowances you’re permitted and any other amount you’d like taken from your paycheck.
If you’re not sure what your allowances are, ask your employer for that information. Alternately, look at the IRS website and download IRS Publication 15, then find the withholding tables near the end of the document. Look for the table that includes your marital status and pay period frequency. Also, the IRS website now has a withholding calculator that can simplify the process.
Next, look up your taxable gross salary range and see your federal income tax withholding figure under the column that matches how many allowances you claim on Form W-4. Subtract the amount owed in federal income tax.
Subtract Your State Income Tax
If you live in Alaska, Texas, Florida, Tennessee, New Hampshire, Nevada, South Dakota, Wyoming or Washington, you are finished. This section does not apply to you since those states do not have a state income tax. Otherwise, your state income tax must also be deducted before you can determine how much money you can expect to take home on each paycheck. Like federal income taxes, your state income taxes are deducted from your gross pay. Also, your state income tax withholding will be determined in much the same way your federal tax withholding was assessed.
Most states use the federal W-4 form to determine your state income tax withholding, but if you completed a separate W-4 form for your state, be sure to use information from it in your calculations for state income tax. Visit your state’s Department of Revenue website to see the withholding tables for state taxes. When trying to determine your state income tax, look at your pay stub or check with your employer to verify that your information is correct.
Use the Information Wisely
What is your net income after taxes? That’s your take-home pay. That should be the figure you’ve now determined through your calculations. Knowing your gross salary before taxes may be impressive to your peers and helpful in getting some types of financing. However, knowing your net income is important for many more reasons. For one thing, you don’t know exactly what your financial situation is until you know your take-home earnings.
Your annual salary definition can determine how you spend money. If you only look at your gross earnings, you may feel richer, but you’ll be poorer if you live as though that’s how much you’re being paid. Also, if you see yourself as earning much more money than you’re taking home each month, you are more likely to spend more money on things because it creates an illusion of having more money to spread around.
Be Cautious if You’re Self-Employed
Those who are self-employed need to be cautious because they may think they can keep much more of their pay than they actually can. Since self-employed individuals don’t have an employer who contributes to things such as FICA taxes, they are required to pay more Social Security and Medicare taxes than those who have a traditional employment situation. In fact, they must pay double the amount that a typical employee pays since there is no employer who pays the other half of the tax. Nevertheless, that extra amount you pay is deductible when you figure out your taxes.
A lot of factors go into self-employment, so few situations are exactly alike. Nevertheless, being self-employed means that you also get some deductions that traditionally employed workers do not. If you work from home, you can deduct expenses for your home office and even internet and phone bills if they are used primarily for business purposes. You may also be able to deduct travel and educational expenses when they’re incurred for business purposes.
When you’re working for yourself, it is important to hold money back every time you get paid, or you can end up deeply in debt to the IRS before you know it. You’re not just putting money in a savings account for a long period of time, though, because you need to pay quarterly income tax payments when you’re self-employed. How much you pay will be determined by many factors, including how much you earn. To be on the safe side, try to set aside approximately 30 percent of your income. You will need to pay both income tax and self-employment tax, so it's better to be overprepared than underprepared. In some cases, you may need to save even more, so consult an accountant if you’re self-employed.
- Your salary is not subject to Social Security tax after you earn more than $110,100 in a calendar year. However, your pay is always subject to Medicare tax. As of March, 2012, the individual Social Security rate is 6.2 percent, and the Medicare rate is 1.45 percent.
Robin Raven is an experienced journalist and author. She has a BFA in writing from the School of Visual Arts and loves to write about personal finance. She has contributed to USAToday.com, The Huffington Post, The Nest, Grok Nation, and many other publications.