How to calculate net pay
The net pay formula subtracts an employee’s gross pay from their paycheck deductions. The formula follows:
Gross pay – deductions = net pay
In the steps that follow, we’ve broken out deductions into three parts: pre-tax deductions, taxes, and additional deductions. With so many deductions to consider, don’t be surprised if two employees with the same gross wages have different net pay. Employees receive different net pay when they request additional withholdings for things like retirement or health insurance savings. Employees may also have wages garnished or live in another state and pay additional taxes because of it. For instance, California employees have additional state withholdings for State Disability Insurance (SDI) and Personal Income Tax (PIT).
Step 1: Start with the employee’s gross pay. In this case, we’ll use the hourly employee from Table 1, whose gross pay for the week was $695. If this employee had zero deductions, their gross pay and net pay would be the same.
Step 2: This is where the deductions begin. Start by subtracting any pre-tax deductions offered by the business, such as health insurance premiums or retirement contributions. Let’s say an employee asks you to deduct 6% of their gross pay each week to put toward their 401(k). They also pay $62 per month for health insurance. This week, the total comes out to $59. Table 4 illustrates the formula.