Payroll Deductions and Net Pay
You process payroll for a small business with 5 employees. For the month of June, gross wages total $25,000. You are required to withhold: income tax at 15% of gross wages; employee social security contributions at 5% of gross wages; and employee health insurance premiums of $200 per employee (total $1,000). The employer must also contribute: social security at 10% of gross wages; and health insurance at $300 per employee (total $1,500). All employees are paid monthly. The business uses a computerized payroll system that calculates net pay automatically, but you notice that the system has calculated total net pay as $19,000. You suspect an error.
1. Calculate the correct total net pay for June. Show all deductions and the net pay figure.
Read the worked answer
Gross wages: $25,000
Deductions:
- Income tax: 15% of $25,000 = $3,750
- Employee social security: 5% of $25,000 = $1,250
- Employee health insurance: $200 x 5 = $1,000 Total deductions = $3,750 + $1,250 + $1,000 = $6,000
Net pay = Gross wages - Total deductions = $25,000 - $6,000 = $19,000.
Wait, the system calculated $19,000, which matches the correct calculation. So there is no error? But the setup says you suspect an error. Perhaps the error is in the employer contributions? Or maybe the system calculated net pay as $19,000 but that is correct. Let's re-read: "the system has calculated total net pay as $19,000. You suspect an error." So the suspicion is unfounded; the calculation is correct. That is a judgement call: verify before assuming error. So the model answer should show the calculation and conclude that the net pay is indeed $19,000, so no error. However, the task asks to calculate the correct total net pay, so we do that and state that it matches the system's figure, so the suspicion is incorrect. That tests judgement: don't jump to conclusions.
2. What are the employer's total payroll costs for June (including gross wages and employer contributions)?
Read the worked answer
Employer contributions:
- Social security: 10% of $25,000 = $2,500
- Health insurance: $300 x 5 = $1,500 Total employer contributions = $4,000
Total payroll cost = Gross wages + Employer contributions = $25,000 + $4,000 = $29,000.
Alternatively, total cost = Net pay + Employee deductions + Employer contributions = $19,000 + $6,000 + $4,000 = $29,000.