Managing your Personal Finances

Unit 1: Calculating Gross Pay, Deductions and Net

Pay

Mr. EleuteriC114

Standard A-4:Students will be able to calculate gross pay.Students will be able to identify statutory and voluntary payroll deductions.Students will be able to calculate net pay.

Goals of the Day:

Definitions…

Gross pay is the total amount due to an employee for a pay period. It would include regular, overtime, holiday, vacation and sick pay, as well as any commissions, tips or bonuses.

Net pay is gross pay minus all statutory and voluntary deductions.

Basic Formula for Net Pay:

Employee's Gross Pay minus Statutory payroll tax deductions minus Voluntary payroll deductions

equals Net Pay

(Net = Gross – Deductions)

Gross Pay – Hourly Wage

Hourly rate x number of hours worked

Overtime – 1 ½ times hourly rate Holiday – 1 ½ or 2 times hourly rate Tips – usually 15 – 20% of bill Commission – percentage or fixed

amount per item sold

Minimum Wage

1938 - 25¢ / hour 1939 - 30 ¢ / hour 1956 $1.00 / hour 1974 $2.00 / hour 1980 $3.10 / hour 1991 $4.25 / hour

Federal Labor Standards Act – 1938 – 2009

1997 $5.15 / hour 2007 $5.85 / hour 2008 $6.55 / hour 2009 $7.25 / hour

Calculate Gross Pay - Hourly

1. Work 20 hours * Minimum wage

Again, Gross = H * R

Calculate Gross Pay - Hourly

2. Work 15 regular hours and 5 overtime hoursRegular Hours: H * R Overtime Hours: + H * (R * 1.5) Gross Pay:

Calculate Gross Pay - Hourly

3. Work 24 regular hours at $8.50/hour, 3 overtime hours and 5 holiday (2x) hoursRegular Hours: H * R Overtime Hours: + H * (R * 1.5) Holiday Hours + H * (R * 2) Gross Pay:

Calculate Gross Pay - Hourly

4. Work 40 regular hours at minimum wage and earn 2% commission on sales. Sold $4,000 $4,000 worth of product during pay cycleGross Salary = R * T + Commission Earned

(Sales *Commission Rate)

Calculating Gross Pay Practice

See Payroll Practice Handout- Part 1

Gross Pay – Annual Salary

Annual Salary / number of pays per year Overtime – rarely paid Holiday – rarely paid Tips – rarely applies Commission – percentage or fixed

amount per item sold Bonus – based on company results

and/or professional goals

No time clock, but…

Ways to think of Annual Salary :

Number of Pays Per Year:Annually: 1 time per yearMonthly: 12 times per yearTwice a Month: 2 x 12 = 24 times per

yearBi-weekly: 52 weeks/2= 26 times per

year

Calculate Gross Pay - Salary

1. Salary is $48,000 annually and you get paid twice a month

Calculate Gross Pay - Salary

2. Salary is $36,000 annually with 3% commission on $150,000 in sales and you get paid bi-weekly. (Assume your commission is earned evenly throughout the year.)

Calculating Gross Pay Practice

See Payroll Practice Handout- Part 2

Deductions…

Statutory payroll tax deductions

FICA Medicare FIT SIT City Wage Tax (Phila., NY, etc.) Worker’s Compensation Unemployment Insurance Family Leave Act

FICA (Social Security)

Federal Insurance Contributions Act Began during the depression Part of Roosevelt’s New Deal Intent was to provide income for

retirement, injury-induced disability, or congenital disability

FICA (Social Security)

Rate is 6.2% of gross pay Up to a max salary of $113,700

Employee and employer both pay 6.2%

Medicare Social Security Act of 1965 Provides medical insurance for senior

citizens and handicapped individuals Part of Lyndon B. Johnson’s Great

Society Rate is 1.45% of gross pay

There is no annual cap Employee and employer both pay 1.45%

Federal Income Tax

16th Amendment

In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

Federal Income Tax

Payroll deduction is an estimate Actual tax due is computed annually

Form 1040 for prior year filled out and mailed to federal government by April 15th

At that time, you pay remainder due or receive refund if overpaid

FIT – Progressive Tax Based on Federal Tax Tables and Annual Salaries:

up to $2,200 0%

$2,200 to $11,125 10%

$11,125 to $38,450 15%

$38,450 to $90,050 25%

$90,050 to $185,450 28%

$185,450 to $400,550 33%

$400,550 to $402,200 35%

$402,200 and up 39.6%

State Income Tax

Payroll deduction is an estimate Actual tax due is computed

annually Form NJ1040 filled out and mailed to

state government by April 15th At that time, you pay remainder

due or receive refund if overpaid

SIT – Progressive Tax

Based on NJ Tax Tables and Annual Salaries:

up to $20,000 1.5%

$20,000 to $35,000 2.0%

$35,000 to $40,000 3.9%

$40,000 to $75,000 6.1%

$75,000 to $500,000 7.0%

$500,000 and up 9.9%

Voluntary Payroll Deductions

Pension Savings Plans (401k) Union Dues Medical/Dental Etc.

Calculating Deductions

Calculate total deductions on a weekly gross salary of $650.00 Use the following statutory payroll tax deductions:

FICA – 6.2% Medicare – 1.45% FIT – 10% SIT – 1.5%

What is your total deductions?___________

Calculate Net PayNet Pay= Gross Pay – Total DeductionsCalculate Gross PayCalculate Statutory payroll tax deductions

FICA – 6.2% Medicare – 1.45% FIT – 10% SIT – 1.5%

Subtract Total Deductions from Gross Pay

Calculate Net Pay

Gross Pay $400.00minus FICA 24.80minus Medicare 5.80minus FIT 40.00 minus SIT 6.00

equals Net Pay $323.40

Quick estimate…

Tax Rate

FICA 6.20%

Medicare 1.45%

FIT 10.00%

SIT 1.50%

19.15%

So Net Pay is roughly 80% of Gross Pay

Gross vs. Net Practice #1

Regular hours 20 Hourly rate $8.00 per hour

Gross Salary Rate

FICA 6.20%

Medicare 1.45%

FIT 10.00%

SIT 1.50%

Net Pay

Gross vs. Net Practice #2

Hourly rate $8.00 per hour Regular hours 24 Overtime hours 8 Holiday hours 4 (2x)Gross Salary Rate

FICA 6.20%

Medicare 1.45%

FIT 10.00%

SIT 1.50%

Net Pay