How to Understand Payroll Tax

How to understand payroll tax is important for both an employer and an employee. When the employer is figuring your net pay, he must calculate how much tax is deducted from your gross wages plus any other deductions you may have. You as the employee should know how the tax is calculated and how this amount was determined. If you look at your check, you will see the gross pay, tax deductions, other deductions and your net pay. However, you want to see how this was figured.

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Instructions

- 1
  
  Take the gross pay, which is what you earned, for that pay period. The gross wage is the amount subject to federal and state taxes, Social Security, Medicare and other deductions. Additional deductions could be pretax deductions, such as a payment for a medical insurance plan or 401(k) contributions; garnishments; child support; other types of health insurance; and union dues.
- 2
  
  Calculate the pretax deductions first. These include a 401(k) contribution and approved health plan. These deductions are taken from the gross wages before any tax is calculated. For example, if your gross wage is $500 and you pay $50 a pay period to a 401(k) and $50 to a medical insurance plan, the amount of your gross wages subject to federal and state tax is $400.
- 3
  
  Calculate Social Security and Medicare tax by using the gross wages. The 401(k) and medical-insurance plan do not affect your gross pay when the employer is calculating Social Security and Medicare deductions. For example, your gross pay of $500 is fully subject to these two taxes. The amount of your tax is figured from the gross without subtracting the pretax deductions.
- 4
  
  Calculate any other non-pretax deductions after the federal and state taxes and Social Security and Medicare deductions are subtracted. For example, your gross pay is $500 minus pretax deductions minus federal (after pretax deductions) minus state (after pretax deductions) minus Social Security (before pretax deductions) minus Medicare (before pretax deductions), which equals net pay minus union dues minus other health-insurance deductions minus child support minus garnishments, which equals your take-home pay.

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How to Understand Payroll Tax

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