Paycheck calculations and taxes

Summary

Get a general overview of how paychecks are calculated, find resources for paycheck FAQs, and learn more about occasional MA and NJ withholding income tax nuances.

Solution

This article is for employers and employees who want to understand how we calculate paycheck taxes and take-home pay.

You can preview estimated taxes and take-home pay outside of Gusto with these tools:

Expand the sections to learn how we calculate paycheck amounts and what factors impact taxes.

How we calculate paycheck taxes

Paychecks follow this formula:

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

Steps to calculate a paycheck

These steps show how we calculate each employee’s paycheck.

Start with gross pay.
- This includes your salary, tips, commissions, and overtime.
Subtract pre-tax deductions.
- Standard deductions include health insurance, Flexible Spending Accounts (FSAs), retirement plans (401k, 403b), and childcare.
Determine taxable wages.
- These are the wages you have left after pre-tax deductions. Taxable wages vary by tax type.
Subtract employee taxes.
- We subtract federal, state, and local income taxes.
Subtract other required taxes.
- We subtract Social Security, Medicare, and Paid Family Leave contributions.
Subtract post-tax deductions.
- We subtract wage garnishments, donations, or 529 plan contributions.
Add reimbursements.
- We add back work expenses you get reimbursed for after taxes
Calculate net pay.
- This is the amount you take home.

Go to our blog for more details on each step.

Paycheck FAQs

Q: How do I read my paystub?

A: You can view your paystub in Gusto. Our blog also explains how to read your paystub.

Q: Why do I owe this much in taxes?

A: Several factors affect your taxes:

Federal income tax: This depends on your W-4 elections in Gusto and Internal Revenue Service (IRS) tax tables.
State income tax: This depends on your state’s tax tables.
Bonus wages: The IRS often taxes bonuses at a flat 22% rate.
Earning thresholds or state moves: These can change your wage base limits and taxes.

Q: I got a payday email, but no money yet. Why?

A: This depends on your payment type:

Direct deposit: Banks have until 5pm local time to release funds.
Check: Ask your employer when they will deliver your check.

Check your paystub in Gusto to confirm your payment type. If you still have issues, try our payment troubleshooting steps.

Q: What if my paycheck is wrong?

A: Contact your employer first. Employers can either fix payroll directly or contact Gusto support.

To contact us, sign in to your Gusto account and click the help icon

in the top-right corner of the page.

State-specific tax information

Some states have unique tax rules that can affect your paycheck. Expand the sections to understand how these state-specific rules work.

Maryland combined county and state taxes

Maryland combines county and state income taxes into one amount. We base county taxes on where employees live, not where they work.

Your withholding may look higher in Gusto compared to previous providers, who separated these taxes. Combine your previous payroll provider’s county and state tax amounts to compare.

Helpful resource

You can use the agency’s estimated payment and withholding calculators to get tax estimates and find the current year’s tax rates.

Massachusetts mid-year income tax increase

Massachusetts employees often see their withholding amounts increase mid-year, even when their pay stays the same. This happens because Massachusetts uses an “annual maximum” rule for Federal Income Contribution Act (FICA) taxes.

Once you pay $2,000 in FICA during a calendar year, you cannot subtract this from your wages before we calculate state taxes.
This increases your Massachusetts state income tax and lowers your net pay.

We use the percentage method (see page 12) to calculate this tax.

New Jersey income taxes when you work in New York

If you live in New Jersey but work in New York, you usually pay New York non-resident income tax plus New Jersey resident tax.

New Jersey residents can take a tax credit for taxes they already paid to other states or jurisdictions.

Large paychecks can trigger an unexpected supplemental rate of 21.3% for New Jersey tax. This rate can look higher than the New York withholding (at a lower rate) than you’re used to.

Oklahoma income tax rounding

When calculating Oklahoma withholding using the percentage method (what Gusto uses), the tax amount must be rounded to the nearest whole dollar.

If the amount is less than 50 cents, the amount is dropped.
- Example: $2.49 becomes $2.00.
If the amount is 50 cents or more, the amount is rounded up to the next dollar.
- Example: $2.50 becomes $3.00.

Details

Symptoms

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