Start with gross pay
For an hourly employee, gross pay often begins with hours multiplied by the applicable rate, plus any overtime, bonuses, commissions, or differentials. For a salaried employee, the period salary may be the starting point, subject to the rules that apply to the employee’s pay arrangement.
Gross pay can be simple or complex depending on the earnings mix. Overtime and certain bonuses can affect the regular rate under the FLSA, which is why “base rate × hours” is not always the final gross-pay calculation.
Then determine taxable wages
Not every payroll line is necessarily taxed the same way. Taxable wages can differ by tax type because some deductions or fringe benefits affect federal income-tax withholding, Social Security, Medicare, or state taxes differently. That is why the tax calculation should use the appropriate taxable-wage base rather than blindly applying percentages to gross pay.
Employee taxes and deductions
- Federal income-tax withholding.
- Employee Social Security and Medicare tax where applicable.
- State and local withholding where applicable.
- Benefit or retirement deductions.
- Garnishments or other required deductions.
- Other authorized post-tax deductions.
Net pay
At a high level, net pay equals gross pay minus employee taxes and deductions, plus any net additions that belong outside taxable gross pay. A payroll review should be able to explain every line between gross and net.
Employer payroll costs are separate
The employee’s net pay does not show the employer’s full payroll cost. Employers can owe their own share of Social Security and Medicare taxes, federal and state unemployment taxes, benefits, workers’ compensation costs, or other expenses. Those belong in the employer’s payroll accounting even though they are not all employee deductions.
Example
Suppose an employee earns $1,500 in gross wages for the period. If employee taxes and authorized deductions total $360 and there are no net additions, net pay is $1,140. The employer may still have additional payroll tax expense and liabilities beyond the $1,500 gross wage amount. This example illustrates the structure only; actual tax calculations depend on current rules and employee facts.
Quick FAQ
Why is my taxable wage different from gross pay?
Certain deductions or benefits can affect the wage base used for a particular tax. The treatment depends on the item and the tax, so taxable wages should be calculated deliberately.
Is net pay the employer’s total payroll cost?
No. Net pay is what remains for the employee after employee-side taxes and deductions. Employer-side payroll taxes and other costs are separate.
How can I check gross-to-net math?
Start with gross pay, list every employee tax and deduction, add any net additions, and confirm the arithmetic reaches the reported net pay. Then separately review whether each tax or deduction was correctly determined.
LeoFolio pathway
For small-employer payroll record preparation, LeoFolio U.S. Pay Run supports one employer and up to five employees per completed run, with reviewable calculations and a coordinated record package.
Source notes for editorial verification
- IRS Publication 15 (2026), Employer’s Tax Guide
- IRS Publication 15-T (2026), Federal Income Tax Withholding Methods
- U.S. Department of Labor — Handy Reference Guide to the FLSA
- U.S. Department of Labor Fact Sheet #16 — Deductions from wages