Payroll: Gross to Net and Employer Obligations
From gross pay to net pay
Start with gross wages, subtract pretax deductions, and the remainder is taxable wages. Employee withholdings then come out: federal income tax, state and local tax where applicable, Social Security at 6.2% up to the annual wage base set by the Social Security Administration, and Medicare at 1.45% with an extra 0.9% on wages above the additional-Medicare threshold. What remains is net pay. A Section 125 health plan reduces both income tax and FICA wages; a traditional 401(k) deferral reduces income tax wages but not FICA wages.
Employer obligations
The employer withholds nothing for itself - it pays its own matching Social Security and Medicare, plus FUTA at 6.0% on the first $7,000 of each employee's wages (0.6% after the full 5.4% state credit) and state unemployment tax. Federal deposits go through EFTPS on a monthly or semiweekly schedule. Form 941 is quarterly, Form 940 annual, W-2 and W-3 go to employees and the SSA, and contractors paid $600 or more receive Form 1099-NEC.
Traps
- Employer taxes are never withheld from the employee's pay.
- W-2 for employees; 1099-NEC for genuine nonemployees. Misclassification is a costly error.
- Overtime is 1.5 times the regular rate for hours over 40 in a workweek; nondiscretionary bonuses can raise the regular rate.
Worked example
An employee earns $1,000 with no pretax deductions. Employee Social Security is $62.00 and Medicare is $14.50; the employer also pays $62.00 and $14.50 and owes FUTA on the first $7,000 of that employee's annual wages. Net pay equals gross minus all employee taxes and deductions - never minus the employer's share.