The Mathematics of Money

586 Chapter 15 Payroll and Inventory

Other Payroll Deductions. A company may offer other payroll deduction programs.

Many companies encourage their workers to contribute to charitable programs like the United

Way through payroll deductions, or offer the opportunity to buy U.S. savings bonds.

In recent years there has been significant growth in 529 plans, state-sponsored pro-

grams similar to 401(k)’s but used to save for a child’s college education. Contributions to

529 plans are made on an after-tax basis, however.

Another fairly common payroll deduction is wage garnishment. This is a court-ordered

deduction made from a worker’s pay to cover a legal judgment, such as child support.

Regardless of the nature and amount of these deductions, all must be subtracted from an

employee’s gross pay to find net, or take-home, pay.

Example 15.1.9 Dave earns a $37,500 annual salary, and is paid semimonthly. His

pretax benefi t deductions are $88.29 semimonthly, and he also has $12.29 in after-

tax deductions. His federal income tax withholding is $121.01 semimonthly and he

also has $35.09 withheld for state income tax, and $93.92 for FICA. He contributes

7% of his gross salary to his 401(k) plan and puts a total of $2,500 each year into

a dependent care FSA.

Calculate Dave’s gross and net semimonthly pay.

Dave’s gross pay is $37,500/24 
 $1,562.50.

To determine his net pay, we need to add up all of his deductions. There are quite a few to

keep track of; to stay organized we will use a table:

Item Calculation Amount

Benefi ts $88.29  $12.29 $100.58

Income taxes $121.01  $35.09 $156.10

FICA Given $93.92

401(k)

(7%)($37,500)_____________

24

$109.38

FSA $2,500/24 $104.17

To tal Add up deduction amounts $564.15

Dave’s net, or take-home, pay is the result of subtracting all of these deductions from his

gross pay. So his net pay is $1,562.50  $564.15 
 $998.35.

Cafeteria Plans

Because different employees have different benefit needs, some employers offer programs

called cafeteria plans, so named because they allow each person to choose the benefits that

fit his needs. Each year the company offers an open-enrollment period when workers can

choose their benefits for the coming year. The company may grant each worker a certain

benefit allowance, and then provide a menu of options with different costs. Each employee

can select the benefits that he wants from the menu and apply the benefit allowance to the

stated cost. If the cost of selected benefits exceeds the benefit allowance, the additional

cost is deducted from the employee’s salary.

Below is an example of a cafeteria plan offering:

OSWEGATCHIE PERAMBULATOR COMPANY

2008 CAFETERIA PLAN EMPLOYEE BENEFIT SELECTION FORM

Benefi t Allowance Per Pay Period $72.55

I. Health Insurance HMO PPO

a. Employee only $34.34 55.75

b. Employee plus spouse/partner $37.90 $38.90

c. Employee plus children $75.89 $123.21

d. Family $96.15 $156.10