Hey y'all. So I've been working on my accounting degree, and I must say that going for accounting has changed my whole perspective on life and government. The most basic thing I learned, and the most useful, was how to calculate one's net pay. In tax season this can be so useful, but not once during high school was it ever taught. I mean, crap, public school system. Whatever happened to preparing us for the real world? Seriously, this is something that everyone should know how to do. It's not even hard. All you need is a normal calculator.
Let's say that Bob worked 50 hours one week, and he makes 8 dollars an hour. The first part is the easiest. All we have to do is calculate his pay at the normal 40 hour limit, then give him 1.5% for the ten hours overtime.
Straight time ---- 40 $8 = $320
Overtime ---- 10 $12 $120
Okay, so before any taxes are removed, Bob has earned $440. But the tax man wants his share, so how much is he going to take? Here are the current tax rates.
Social security -- 6.2%
Medicare -- 1.45%
Federal Withholding -- 10%
State Withholding -- 2%
Now remember, those are percentages and not plain numbers. So to calculate Bob's pay for each of them, we multiply his gross pay by those numbers.
440 x .062 = 27.28
440 x .0145 = 6.38
440 x .1 = 44.00
440 x .02 = 8.80
Total tax: 86.46
Okay, so now all we have to do is take the total tax away from gross pay.
440 - 86.46 = $353.54
So there we go. Bob worked fifty hours, earned $440, and gets a check for $353.54. What makes this even more devious is that this same money is taxed not only for Bob, but for Bob's boss. The boss has to pay the same percentage of Social Security and Medicare taxes, but instead of withholding, the boss pays a FUTA of .8% and a SUTA of 1.20. If you do the math, this means that Bob's boss has to pay $482.46 for his employee to get $353.54. This gap gets wider the more the employee is paid. Keep that in mind if you want to start a business.
You might ask, "But what am I going to use this knowledge for if I don't have any employees?" Well, to make sure you're not being cheated, for one. For two, you may, like myself, find that one year your employer decides not to send you your W-2. And you may find that because your boss pays you direct deposit, you have no paystubs. Great.
So what do you do in that case? You go back to your online banking and look through your deposits -- though make sure you do this pretty soon, as your online bank statement only goes back so far. When I tried to do it, January 2012 was cut off. Anyway, see how much your employeer has paid you for the year in question. You add all that stuff up, then get your net pay. Before I realized that January was cut off, I stared at that number like a derp. Here I had my supposed net pay in my lap, but what was my gross pay, which the tax man surely wanted to know?
The answer is math *waits patiently as readers groan*. You know how in algebra they have formulas and all that crap? Well, it turns out that the formulas aren't crap, but are quite useful. All we need to do is make one of our own.
First we do a word formula. Basically, how do we get our net pay in the first place?
Gross Pay - Taxes = Net Pay
Okay, now we need to translate the word formula into a number formula. For this, we'll set X to mean our gross pay. Y will equal our net pay.
X - (.062X + .0145X + .1X +.02X) = Y
We get this formula by taking the number value of the percentages and multiplying that by X, then adding all those percentages together. Then we can take them away from our gross pay. You might feel intimidated by that formula, but don't fret! You don't actually have to use it. When we solve for X in algebra, we have to make the formula as simple as possible. We can do that without knowing how much X or Y is. We just add all the percentages together.
X - .1965X = Y
Heck, that's not even the simplest form of the equation. We can already minus the .1965X from X. We just assume that there's a 1 in front of the first X, and minus the .1965 from 1.
.8035X = Y
There. Now whenever you want to calculate your net pay, you just multiply your gross by .8035. Or you can until the tax rates change. Then all you have to do is change the formula and you're good.
"Wait, wait," you protest. "I thought we were calculating gross pay from our net, not the other way around."
The formula still applies. Just a little differently. Let's use Bob's numbers again. Let's pretend he only knows his net pay, and needs to figure out his gross.
.8035X = 353.54
Anyone familiar with algebra already knows that we have to divide the net pay by .8035 and we're golden.
X = 353.54 / .8035 = 440
So to calculate gross pay, our formula is X = Y/P, assuming that P stands for tax percentage.
This has been your nerd-out for the day.