How to Determine a Reduction in Annual Salary

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One of the first thoughts many have when they hear that their employer is reducing their salary is about how they will be able to pay their bills. It does not take a lot of time to calculate your annual salary after a reduction, but it can be time consuming -- and stress inducing -- to rework your budget in a way that decreases the reduction’s impact on your lifestyle.

Calculating Your New Salary

  • Subtracting the stated reduction from your current rate of pay gives you your new rate. Multiply the new rate by your pay increments to determine what you can expect for your new gross pay per pay period. Determining your new annual salary requires multiplying the new gross by the number of pay periods in a year. Say your supervisor tells you the company is reducing your pay by $50 per week from your current rate of $650. If you receive a weekly paycheck, multiply $600 by 52 to calculate your new annual salary of $31,200.

Cost of the Reduction

  • Depending on your current salary, the reduction may not sound like a lot of money. However, even $50 a week can seem significant when you consider the monthly or yearly cost. A $50 weekly reduction totals $2,600 yearly or, on average, $216.67 per month. This amount can have a significant impact, as it might be the same as your average cell phone or other monthly utility bill.

New Budget

  • Cutting nonessential extras from your household budget can help you adjust to the drop in income so you don't feel it as much. Even those without a coffee addiction or weekly date night can typically find ways to decrease spending. According to the Small Business Administration, some states require employers to provide employees with advance notice before instituting a pay cut. If this applies to your workplace, it should give you time to develop new spending habits before losing part of your income.

Reduce Your Payments

  • If you are under a garnishment order from a court, repaying student loans or making payments as part of a bankruptcy or another income-based payment plan, contact the recipient of this payment. A reduction in your salary can lead to a reduction of some types of payments. Lower payments can mean more money stays in your household. If a lower payment means that the term of the loan or payment plan is extended, additional interest charges could increase the total amount repaid.

Increase Your Net Income

  • You can offset a salary reduction by changing your withholding to increase your net pay. If you are claiming fewer than the actual number of dependents you support, increasing the number could increase your take-home pay. The Internal Revenue Service provides a withholding calculator to help taxpayers determine the correct number of exemptions to claim. Consult a tax professional to determine how to adjust this number without owing taxes when you file.

References

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