How to figure out how payroll adjustments affect your pay
There was a time when getting paid was much simpler than it is today. You would work for day, or a certain number of hours, and receive your wages for your time. In today's world, there is a lot more that goes into calculating your pay. There are many different kinds of deductions such as taxes, 401(k) savings, insurance premiums, or any other deduction that is tied to a benefit, charity, or something else that your company offers.
With all the myriad of additions and subtractions from your paycheck, it can be daunting trying to figure out how a change to one or more of the components of your final paycheck can affect the overall check. Most employees probably just figure that the accounting department know what they are doing, and don't question the results of their paycheck, or the results of adjustments when they occur. But believe it or not, mistakes do happen, even from the payroll department. Employees naturally assume that some magical software accounting and payroll package just takes care of it all without too much thought on the part of the payroll accountant. Any employee can do the calculations in the same manner as the accountant, and double check the results of their work. Most paycheck statements are quite straight forward. They list, (or should list), all the different components that are added and subtracted to calculate your net pay.
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Begin with a spreadsheet on your computer, or even just a piece of paper that you can put into columns. Have a total at the bottom of each column. These totals will have a grand total, which is your final result. Having a spreadsheet is recommended so that you can play with different scenarios without having to re-calculate the total every time you make a change.
- Calculate your base pay. If you are a salaried employee, this is the easy part. Write down your monthly salary. If you are an hourly employee, put down the number of hours that you worked, or that you expect to work, and calculate your gross pay by multiplying the hours by the hourly wage. If you are not using a spreadsheet, you can use a calculator, or do it the old fashioned way.
- Calculate additions to your base pay.
If you have commissions, tips, overtime pay, bonuses, sick leave pay, or some other addition which is outside of the normal pay you receive, put that in the additions column. If you have several of these pay additions, you can use more than one column.
By totaling the above columns, you will have your gross pay. The next thing to do is to figure out your total deductions.
- Calculate your state, federal, and FICA tax. You can figure the percentage of your paycheck which goes to taxes by dividing the tax withholding by your gross pay. Once you know the percentage, use this in your formulas to figure your tax withholdings by multiplying the tax percentage by your gross pay. If you want to see what changing your number of exemptions on your W-2 form will do to your pay, then you can build this into your spreadsheet formulas as well.
- Medical and other kinds of insurance premiums, charitable deductions, 401(k) investments deductions, and any other kind of deduction should be about the same each paycheck during the fiscal year. In each of these categories, simply put the monthly amount in the total column. If you know a calculation for one of these categories, and you want to track different scenarios, then derive your totals using the different parameters. For example, you are thinking about getting married, and having your spouse covered on your health plan. The amount of your medical insurance will go up in this scenario, so you can build in a little formula into this column.
Once you have itemized all the different pieces that make up your net pay, you have the tools to enter the original information, and then the new information with the anticipated changes. You can even make a copy of the original work sheet before creating the adjusted scenario so you have a reference point. If you are using the old fashioned method of pencil, calculator and paper, you can do the same thing, it will just take longer. You should also double check your calculations to make sure that you didn't enter some of the numbers incorrectly. You can then take the original total and subtract the new total. The difference, whether positive or negative is the amount that your paycheck will be affected by your change.
