Going from being a salaried worker to an hourly employee can be a huge adjustment, especially when you get your paycheck. You may notice that your earnings vary from one pay period to the next.
It’s important to calculate your earnings so that you can budget your spending. How or when you choose to pay bills, either the middle or the end of the month, for instance, may change.
There are lots of items to take into consideration, such as your hourly rate, the number of hours you’ll be working, and benefits. The biggest effect on your paycheck is your taxation rate. Federal and state taxes can impact your pay by 25% or more.
So how is that calculated?
Here’s how you should calculate tax deductions on your paycheck if you’re an hourly employee.
Determine Gross Pay
Gross pay is the total earning before any deductions. This will help determine your withholding when completing a W-4.
For instance, if you get paid bi-weekly and are a full-time hourly employee, then you will work an average of 80 hours per pay period. If your hourly wage is $15 per hour, then your gross bi-weekly pay would be $1200.
The number of allowances you indicate on your W-4 can vary. You can take allowances for yourself, your spouse, and each of your dependents. You can include other allowances for things such as:
- Tax credits you will receive
- Itemized deductions you plan to claim
- IRA contributions you make
- Business expenses
- Moving expenses
- Alimony payments
You can adjust your allowances depending on if you want more or fewer taxes taken out.
Subtract Pre-Tax Withholdings
Once your gross pay is determined, subtract any pre-tax withholdings. Pre-tax deductions might include benefits such as health insurance premiums or contributions to a flexible spending account.
If you contribute to a retirement plan or pension, that should be subtracted from your gross earnings, too.
Determine FICA Withholding
Social Security and Medicare taxes are taken out at a flat rate, regardless of your income, to a point.
Whether you are a salaried employee or get paid by the hour, you are responsible for a 6.2% Social Security tax contribution. You can multiply your gross wages, after subtracting pre-tax withholdings, by 6.2 percent. This will determine the FICA withholding.
For Medicare tax, you and your employer are each responsible for paying 1.45%. The Medicare tax increases by 0.9% if you earn over $200,000.
Calculate Federal Tax Deduction
The amount of federal income tax withholdings depends on your allowances, filing status, and income.
Deductions are calculated by including the number of allowances you have, including yourself. Your filing status can be single, head of household, married filing jointly, married filing separately or qualifying widower.
According to the IRS, you can file as Head of Household if you are “unmarried and pay more than 50% of the costs of keeping up a home for yourself and your dependent(s) or other qualifying individuals.”
Once the allowances are determined, refer to the IRS Publication to find the tax. Subtract that percentage from your gross salary.
Calculate State and Local Tax Deductions
The amount of tax deducted from your paid job varies from state to state.
In addition, some municipalities have further deductions. You would need to look up your state’s tax table and find the deduction in the same way you found your federal tax deduction.
Review Your Withholdings
If you are an hourly employee, it’s a good idea to check your withholdings periodically. Your employer’s accountants are people, and sometimes mistakes are made.
Also, it’s possible that situations change, and the amount of tax withheld could be too much or too little. You don’t want to end up owing too much money come April 15th.
However, some people don’t mind getting a hefty tax return to pay off bills, for repairs around the house, or for a fun expense like a vacation. It’s okay to turn in a new W-4 to your employer if you want your withholdings adjusted.
The best way to model your tax deductions is by using an online tax calculator. Input information such as your hourly wage, how often you get paid, pre-tax deductions, post-tax deductions (both federal and state), and play around with different withholdings to find “your number.”
Hourly Employee Adjustments
Switching from a salaried position to being an hourly employee is an adjustment in more ways than one. However, it has its benefits.
Many jobs these days require more than a 40 hour work week. If you’re paid hourly, that may mean overtime pay. In addition, your employer may be flexible about when you put in those hours.
Nonetheless, it’s always a good idea to be prepared. Correctly calculating your tax deduction can help you budget your finances.
The post How to Calculate Deductions From Your Hourly Paycheck appeared first on Personal Finance Syndication Network.