Net Pay and Deductions
What this domain tests
Payroll items ask you to build gross pay from hours, salary, commission, or piecework, then subtract statutory and voluntary deductions to reach net pay. Some items reverse the process and ask for gross pay given net pay.
Core rules
- Gross pay: hourly = rate × hours, with overtime at 1.5 × the regular rate for hours beyond 40 in a workweek. Salary per period = annual salary ÷ periods per year (26 biweekly, 24 semimonthly, 12 monthly). Commission = rate × sales; piecework = rate per unit × units produced.
- FICA: Social Security is 6.2% of wages up to an annual wage base that is adjusted each year (for example $168,600 in 2024 and $176,100 in 2025); Medicare is 1.45% with no cap, plus an extra 0.9% on wages above $200,000.
- Federal income tax withholding depends on the W-4, filing status, and pay frequency, applied through a percentage method or wage-bracket table.
- Net pay = gross pay − all deductions. Voluntary deductions include health insurance, retirement contributions, and union dues.
- Pre-tax deductions such as traditional 401(k) contributions and Section 125 health premiums reduce taxable wages before income tax and often before FICA.
Worked example
An employee earns $18.50 per hour and works 46 hours in one week. Federal withholding is $92, state tax $28, Social Security 6.2%, Medicare 1.45%. Find net pay. Gross: 40 × 18.50 = $740.00; overtime 6 × (18.50 × 1.5 = 27.75) = $166.50; total $906.50. Social Security = 906.50 × 0.062 = $56.20; Medicare = 906.50 × 0.0145 = $13.14. Total deductions = 92 + 28 + 56.20 + 13.14 = $189.34. Net pay = 906.50 − 189.34 = $717.16.
Traps that cost marks
- Paying overtime on all hours, or paying overtime hours at straight time.
- Applying Social Security tax to wages already above the annual cap.
- Treating a biweekly payroll as semimonthly, which is 26 versus 24 periods.
- Using gross pay as the base for a deduction that is actually applied after tax.
- Forgetting that only hours over 40 in a single workweek trigger overtime.