The amount your employees receive on their paychecks is always lower than the sum they earn for their labor. As an employer, you are responsible for collecting payroll taxes from employee paychecks and then periodically remitting these sums to the appropriate government agencies. You may also be required to withhold payments such as child support based on a specific employee's circumstances, and you may implement plans such as health insurance that require additional withholdings. The amount that your employees receive in their paychecks after all these figures are subtracted is their net pay.
Net vs. Gross Pay
When you write employee paychecks, the difference between net and gross pay can seem like a windfall. Your total payroll may be $3,000, but you only have to issue $2,400 worth of paychecks. Keep in mind that the remaining $600 still comes out of your bank account sooner or later and should be figured into your budget.
If the Internal Revenue Service has placed your business on a monthly payroll tax deposit schedule, you are required to make online federal withholding deposits monthly on the 15th day of the month following the one in which the paychecks were issued. If you make federal payroll deposits on a weekly basis, you must remit these funds almost immediately.
A more frequent payment schedule can put more of a strain on your cash flow, but it makes it easier to plan because you pay as you go rather than making large payments all at once. Similarly, you must periodically pay out all other payroll deductions to the agencies that collect them, such as child support payments to your state's department of child support.
Types of Payroll Deductions
In addition to taxes and child support, the net pay listed on the bottom line of your employees' paychecks may also reflect mandatory withholdings such as wage garnishments due to circumstances such as unpaid back child support or legal fees and penalties owed. Also, many benefit plans require some contribution on the employee's part, such as a weekly sum put into an individual retirement account or a health insurance plan that requires employees to pay a portion of the premiums. If your company offers a stock option plan to employees, the contribution component is also deducted from the period's gross pay and reflected in the net pay. Be sure to track the deductions your company withholds from gross pay to arrive at net pay amounts closely and pay them when due.
Calculating Net Pay
To calculate net pay, add all payroll withholdings and then subtract this sum from the gross pay amount. Use the paycheck stubs to itemize the amounts you withheld, so employees understand how their gross pay differs from their net.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.