Gross Wages Vs. Net Wages
- Federal and state governments require employers to deduct payroll taxes from employee paychecks. These payroll taxes include FICA taxes, which consist of Social Security and Medicare taxes, federal income tax and state income tax. The employer calculates FICA taxes as a percentage of gross wages. The employer calculates federal income tax and state income tax based on the number of exemptions the employee claimed on his Form W-4. The higher the number of exemptions, the less tax withheld by the employer.
- Companies allow employees to deduct payment for employee benefits from their gross wages. These benefits may include medical insurance, dental insurance, life insurance, health saving account contributions, 401k plan investments or 529 account investments. Some benefits reduce the employee's taxable income. Insurance premiums often are shared by the employee and employer and allow the employee to pay a reduced rate for coverage. Health savings contributions are deposited directly into the employee's account. The 401k plan investments allow the employee to save for retirement. The 529 account investments allow the company to save college funds for a named beneficiary.
- Some companies hire union members to work for the company. Union members pay dues to the union in exchange for benefits provided by the union. These benefits include negotiating for improved work conditions and compensation packages and representation in the event of company actions against the employee. The company deducts the union dues from the employee's gross wages and submits payment directly to the union.
- Some employees have children who do not live with them. State child support agencies mandate that these employees pay child support to assist the custodial parent with living expenses for the children. Most states require these child support payments be deducted from the employee's gross wages and submitted to the child support agency. The child support agency pays the custodial parent.