Paycheck calculations and questions

The short answer

Gross pay – Pre-tax deductions – Taxes + Reimbursements = Net pay

The long answer

Head to our blog for more info on each of the steps below. 

1. Calculate the employee’s gross wages for the pay period, which includes: 
   • Pay;
   • Tips;
   • Commission, and;
   • Overtime (if applicable)
2. Subtract pre-tax deductions.
   • Common pre-tax deductions: 
     • Health insurance premiums;
     • Health care deductions (like an FSA);
     • Retirement contributions (like a 401k or 403b); 
     • Childcare assistance, etc.
   • The remaining wages are considered taxable wages. 
     • Heads up: What’s considered taxable wages can vary by tax type.  
3. Subtract employee-taxes, which include:
   • Federal income tax
   • State income tax
   • City and local taxes
4. Subtract other taxes (that employees and employers pay), which may include:
   • Social security
   • Medicare
   • Paid family and medical leave contributions
5. Subtract other voluntary or involuntary deductions (post-tax deductions), these might look like:
   • Wage garnishments (court-ordered withholdings), like child support.
   • Charitable donations
   • Contributions to a 529 savings plan
6. Add reimbursements.
   • Reimbursements are added in after taxes because they’re not income an employee has earned. The money is owed back to them for a work-related expense they incurred.
7. Total for net pay—what the employee takes home.

Q: How do I read the paystub?

A: Our blog can walk you through reading a paystub. Employees can view their paystubs in Gusto. 

Q: Why did I get taxed the amount I did?

A: There are several factors that go into tax calculations—we can’t give a specific answer in an article, but generally speaking: 

• Employees' federal income tax is calculated using the tax withholding information entered in Gusto and the current IRS tax tables—elections can be changed at any time. 
• State income tax is calculated using the tax withholding information entered in Gusto and the state's current tax tables.
• Bonus wages are sometimes taxed at a much higher, 22%, withholding rate. 
• When certain earning thresholds are met, or when employees move states, wage base limits may change the tax amounts withheld.

Q: I got a payday email but haven't received my money yet, what's going on?

A: It depends on how your employer processed your payment (direct deposit or check):

• If processed as a direct deposit: Banks have until 5 pm local to make funds available in your bank account.
• If processed as check: Your employer should be delivering the funds to you personally.

Verify how your payment was processed (direct deposit or check) by viewing your paystub Gusto, and then, either:

• Wait until the end of the day for your payment to hit your bank account, or;
• Reach out to your employer about when you'll receive the physical check. 

If there's still a payment issue, you can try the payment troubleshooting tips in this article. 

Q: What if the paycheck is wrong?

A: Employees should reach out to their employers so they can review the payroll—employers can either contact us with additional questions, or try to adjust the payroll themselves if wages were incorrectly entered. 

Maryland (MD) county taxes are paid and filed together with state income tax, in one lump sum. For this reason, when payroll is run, we’ll automatically add the county-specific tax amount (based on an employee’s home address) in with the state income tax amount. 

• Reminder: Maryland county taxes are based on where an employee lives, not where they work.

If you’re comparing the income tax from a Gusto paystub, to another provider’s, Gusto’s withholding may look higher (because the previous provider separated county taxes). Take a look at your combined withholdings from previous providers before comparing to your Gusto paystub. 

Additional resource

Employees (and employers) can get tax estimates and find the current year’s tax rates by using the agency’s estimated payment and withholding calculators.

Massachusetts (MA) employees’ withholding amounts often change (increase) mid-year, even when their pay remains the same—this is a result of the “annual maximum” in Massachusetts’s withholding instructions.

The $2000 “annual maximum” for FICA

When an employee exceeds $2,000 in FICA taxes (social security and medicare) during the calendar year, they can no longer subtract their FICA amount from wages prior to calculating their MA income withholding tax.

This results in increased state income tax, and decreased net pay. 

For more detail about the MA income tax calculation, we use the percentage method (detailed on page 12) to calculate the tax. 

If you work in New York (NY) and live in New Jersey (NJ), you typically pay NY income taxes as a non-resident, and pay NJ income taxes as a resident. 

• Reminder: NJ residents can take a tax credit for taxes that have been paid to other jurisdictions.

Some NJ employees, who are used to seeing NY income tax, may see higher NJ income tax show up unexpectedly. This is typically a result of a large pay amount that requires withholding at the NJ supplemental tax rate of 21.3% (rather than a lower NY rate).