Payroll 101: Understanding a “Simple” Paycheck

We have all looked at the net take-home pay on our checks, but have you ever wondered about the total company cost for each paycheck? This post will look at a simple paycheck and break down how the take-home pay is calculated. We will also review how much that paycheck cost the company. 

Here’s the information for the fictitious company that we’ll be looking at:

• California based company
• The employee is paid by the number of hours worked (hourly wages)
• The employee contributes to a retirement plan

Here are the key parts of a paycheck:

1. Pay Date
   Drives calculations and reporting, which will be important to remember in my next blog post.
2. Wages earned
   What an employee is paid. Also called “Total Pay”
3. Employee Taxes (tax withholdings)
   Taken out of the employees wages
   Held by Employer and paid on behalf of the employee
4. Employee Deductions
   These may or may not be shown on the paycheck
   Voluntary & nonvoluntary; taken out before take home pay
5. Employer Taxes
   Additional employer expense
   Used to fund programs such as unemployment
6. Employer Contributions
   These may or may not be shown on the paycheck
   Additional employer expenses in the form of contributions like retirement plan matching

The take home pay, or the Net Pay, is equal to the Total Pay (sum of all the wages earned) minus Taxes Withheld minus any Deductions.
Net Pay =  [Total Pay] - [Taxes Withheld] - [Deductions]

Ok, quiz time! Let's see if you can calculate the total cost to the company for this paycheck. 
As a reminder, here are the numbers from this paycheck:

• $445.00  Total Pay
• $  82.17   Employee Taxes
• $  22.25   Employee Deductions
• $340.58  Net Pay [Total Pay - Taxes Withheld - Deductions = Net Pay]
• $  54.95   Employer Taxes
• $  22.25   Employer Contributions

Take a moment and see if you can calculate the total cost to the company for this paycheck then scroll down to find out what it is.

Answer

Here you go! For this paycheck, the formula is: Total Pay + Employer Taxes + Employer Contributions = $522.20.  This is the total cost to the company for this paycheck. So the employee takes home $340.58, but the company paid an additional $181.62 or 53% more!

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