Deduction Impact on Net Pay
Your net, or take-home, pay is your gross pay minus your deductions. Sounds simple, but deductions can be complex, because they come in various forms. They are either mandatory or voluntary, and both reduce your net pay.
Pretax deductions are taken out of your gross wages before your taxes are. They lower the amount you are taxed on and therefore reduce your tax liability. They include qualified benefits, as defined by the Internal Revenue Service, such as health and life insurance, accident insurance, dependent care reimbursement programs, parking and mass transit expense accounts, retirement plans and health savings accounts. Because pretax deductions are exempt from certain taxes, they give you a higher net pay than if you paid for your benefits with after-tax money. In the latter case, your premium for the benefit is taken out of your wages after taxes are withheld.
If you do not have pretax deductions, taxes come out of your gross wages first. Federal taxes include federal income tax, Social Security tax and Medicare tax. Your employer withholds federal income tax based on your W-4 form and the IRS withholding tax tables. As of 2013, your employer withholds Social Security tax at 6.2 percent of your taxable wages up to $113,700 for the year, and Medicare tax at 1.45 percent of all your taxable wages. If you earn more than $200,000 for the year, your employer must withhold an additional Medicare tax of 0.9 percent from your wages.
Depending on your state, you must pay state income tax, and, if applicable, local income tax. Your withholding rates depend on the state revenue agency and local tax assessor’s guidelines. In some cases, employers must also withhold state disability insurance and state unemployment insurance from their employees’ wages.
A wage garnishment is taken out of your disposable earnings, which is your pay after legally required deductions such as taxes and state unemployment insurance are deducted.
Post-tax deductions are the last deductions to come out of your pay. They health and disability insurance, union dues, donations, Roth 401(k), paycheck advance repayment and individual retirement accounts. The remainder of your wages after post-tax deductions is your net pay.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.