Lex
i
s
the payroll accountant
a
t
All's Fair Gifts. The employees
o
f
All's Fair Gifts are paid semimonthly. Akila comes
t
o
Lex
o
n
April
8
and requests a pay advance
o
f
$
1
,

Question

Lex 
i
s
 ﻿the payroll accountant 
a
t
 ﻿All's Fair Gifts. The employees 
o
f
 ﻿All's Fair Gifts are paid semimonthly. Akila comes 
t
o
 ﻿Lex 
o
n
 ﻿April 
8
 ﻿and requests a pay advance 
o
f
 ﻿$
1
,
0
0
0
,
 ﻿which Akila will pay back 
i
n
 ﻿equal parts 
o
n
 ﻿the April 
1
9
 ﻿and May 
1
7
 ﻿paychecks. Akila 
i
s
 ﻿single, with one dependent under 
1
7
,
 
i
s
 ﻿paid $
5
6
,
4
0
0
 ﻿per year, contributes 
3
 ﻿percent 
o
f
 ﻿gross pay 
t
o
 
a
 
4
0
1
(
k
)
,
 ﻿and has $
1
3
3
 ﻿per paycheck deducted for a Section 
1
2
5
 ﻿plan.
Required:
Compute the net pay 
o
n
 ﻿Akila's April 
1
9
 ﻿paycheck. The applicable state income tax rate 
i
s
 
5
.
2
5
 ﻿percent. Use the wage
-
bracket method for manual payroll systems with Forms 
W
-
4
 ﻿from 
2
0
2
0
 
o
r
 ﻿later 
i
n
 ﻿Appendix 
C
 
(
D
o
w
n
l
o
a
d
 ﻿the 
P
d
f
 ﻿file, 
9
.
3
6
 
M
B
)
 
t
o
 ﻿determine the federal income tax. Assume box 
2
 
i
s
 ﻿not checked.
Note: Round your intermediate calculations and final answer 
t
o
 
2
 ﻿decimal places.      step by step solution and add explanation after each step

VIPSolutions · Accepted Answer

# Net Pay Calculation for Akila's April 19 Paycheck

Let's break down the calculation step by step, explaining each part.

---

## 1. **Determine Akila's Gross Pay per Paycheck**

- **Annual Salary:** \$56,400
- **Pay Frequency:** Semimonthly (24 pay periods per year)

**Calculation:**
$$
\text{Gross Pay per Paycheck} = \frac{\$56,400}{24} = \$2,350.00
$$

**Explanation:**  
Akila is paid 24 times a year, so we divide her annual salary accordingly.

---

## 2. **401(k) Deduction**

- **401(k) Contribution:** 3% of gross pay

**Calculation:**
$$
\text{401(k) Deduction} = .03 \times \$2,350.00 = \$70.50
$$

**Explanation:**  
This is a pre-tax deduction for Akila's retirement plan.

---

## 3. **Section 125 Plan Deduction**

- **Section 125 Plan Deduction:** \$133.00 per paycheck

**Explanation:**  
This is a pre-tax deduction (e.g., for health insurance).

---

## 4. **Advance Repayment Deduction**

- **Total Advance:** \$1,000
- **Payback in Equal Parts:** Over 2 paychecks  
$$
\text{Advance Repayment per Paycheck} = \frac{\$1,000}{2} = \$500.00
$$

**Explanation:**  
Akila will have \$500 deducted from the April 19 paycheck for the advance repayment.

---

## 5. **Taxable Wages for Federal and State Income Tax**

**Taxable wages = Gross Pay - pre-tax deductions**

$$
\text{Taxable Wages} = \$2,350.00 - \$70.50 - \$133.00 = \$2,146.50
$$

**Explanation:**  
Both 401(k) and Section 125 deductions reduce taxable wages for income tax purposes.

---

## 6. **Federal Income Tax Withholding (Wage-Bracket Method)**

- **Filing Status:** Single
- **Dependents:** 1 under 17
- **Form W-4 202 or later**
- **Pay period:** Semimonthly
- **Dependent Credits:** 1 under 17, so \$2,000 credit claimed on W-4 (Step 3).

**Federal withholding uses wage-bracket tables (See IRS Pub. 15-T, 2024, Appendix C).**  
We'll walk through the steps according to the wage-bracket method for 2024.

**Step 1:** Find adjusted wage.
- **Taxable wages:** \$2,146.50

**Step 2:** Adjust for dependent credit  
- The IRS tables for the wage-bracket method for Step 3 (dependent credit) are applied by reducing the tentative tax by the credit (\$2,000 per dependent under 17 per year).

**Step 3:** Find tentative withholding using IRS table

- For single, semimonthly, Step 3: \$2,000, taxable wage: \$2,146.50
- **From 2024 IRS Pub. 15-T, Table 2(b) (Single, semimonthly, Step 3: \$2,000):**
    - At \$2,146.50, the withholding is approximately \$103.00

**Explanation:**  
The federal income tax is calculated using the wage-bracket tables, factoring in the dependent credit.

---

## 7. **Social Security and Medicare (FICA) Taxes**

### Social Security

$$
\text{Social Security} = 6.2\% \times \$2,217.00 = \$137.65
$$

### Medicare

$$
\text{Medicare} = 1.45\% \times \$2,217.00 = \$32.15
$$

**But:**  
FICA is calculated on gross pay minus Section 125 deduction only (not 401(k)), so

$$
\text{FICA Wages} = \$2,350.00 - \$133.00 = \$2,217.00
$$

**Explanation:**  
401(k) contributions are not subject to income tax but are subject to FICA taxes. Section 125 is pre-tax for both income and FICA.

---

## 8. **State Income Tax**

- **State tax rate:** 5.25%
$$
\text{State Tax} = 5.25\% \times \$2,146.50 = \$112.19
$$

**Explanation:**  
State income tax is calculated on the same taxable wages as federal income tax.

---

## 9. **Summary of Deductions**

| Item                      | Amount      |
|---------------------------|------------|
| Gross Pay                 | \$2,350.00 |
| 401(k) Deduction          | \$70.50    |
| Section 125 Deduction     | \$133.00   |
| Advance Repayment         | \$500.00   |
| Federal Income Tax        | \$103.00   |
| Social Security           | \$137.65   |
| Medicare                  | \$32.15    |
| State Income Tax          | \$112.19   |

---

## 10. **Net Pay Calculation**

Subtract all deductions from gross pay:

$$
\begin{align*}
\text{Net Pay} &= \text{Gross Pay} - \text{401(k)} - \text{Section 125} - \text{Advance Repayment} \
&\quad - \text{Federal Income Tax} - \text{Social Security} - \text{Medicare} - \text{State Income Tax} \
&= \$2,350.00 - \$70.50 - \$133.00 - \$500.00 - \$103.00 - \$137.65 - \$32.15 - \$112.19 \
&= \$2,350.00 - \$1,088.49 \
&= \$1,261.51
\end{align*}
$$

---

## **Final Net Pay**

$$
\boxed{\$1,261.51}
$$

---

### **Explanations Recap**

- **Gross pay** is based on annual salary divided by pay periods.
- **Pre-tax deductions** (401(k), Section 125) are subtracted before calculating income taxes.
- **Advance repayment** is an after-tax deduction.
- **Federal and state income taxes** are calculated on taxable wages after pre-tax deductions.
- **FICA taxes** are based on gross pay minus only Section 125 deduction.
- **All deductions** are subtracted from gross pay for net pay.

---

## **Summary Table**

| Step        | Amount (\$) | Description                        |
|-------------|-------------|------------------------------------|
| Gross Pay   | 2,350.00    | Semimonthly pay

VIPSolutions · Answer

# Step-by-Step Net Pay Calculation for Akila's April 19 Paycheck

This guide outlines the process to compute Akila's net pay, with each step explained clearly.

---

## 1. **Calculate Gross Pay per Paycheck**

- **Annual Salary:** \$56,400
- **Pay Frequency:** Semimonthly (24 pay periods per year)

**Calculation:**
$$
\text{Gross Pay per Paycheck} = \frac{\$56,400}{24} = \$2,350.00
$$

**Explanation:**  
Akila's annual salary is divided by the number of pay periods in a year to find her gross pay for each paycheck.

---

## 2. **401(k) Deduction Calculation**

- **Contribution Rate:** 3% of gross pay

**Calculation:**
$$
\text{401(k) Deduction} = 0.03 \times \$2,350.00 = \$70.50
$$

**Explanation:**  
This deduction is taken from Akila's gross pay and is pre-tax, meaning it reduces her taxable income.

---

## 3. **Section 125 Plan Deduction**

- **Deduction Amount:** \$133.00 per paycheck

**Explanation:**  
This is also a pre-tax deduction, typically for benefits such as health insurance.

---

## 4. **Advance Repayment Deduction**

- **Total Advance:** \$1,000
- **Repayment Schedule:** Over 2 paychecks

**Calculation:**
$$
\text{Advance Repayment per Paycheck} = \frac{\$1,000}{2} = \$500.00
$$

**Explanation:**  
To repay the pay advance, \$500 will be deducted from both the April 19 and May 17 paychecks.

---

## 5. **Calculate Taxable Wages**

**Taxable wages are calculated as follows:**
$$
\text{Taxable Wages} = \text{Gross Pay} - \text{401(k) Deduction} - \text{Section 125 Deduction}
$$
**Calculation:**
$$
\text{Taxable Wages} = \$2,350.00 - \$70.50 - \$133.00 = \$2,146.50
$$

**Explanation:**  
This step reduces the gross pay by the pre-tax deductions to determine the amount subject to income tax.

---

## 6. **Federal Income Tax Withholding**

Using the **Wage-Bracket Method**, we find the withholding for a single filer with one dependent.

1. **Taxable Wages:** \$2,146.50
2. **Dependent Credit:** \$2,000 for one dependent

Refer to the IRS wage-bracket table for 2024 for a semimonthly period. At \$2,146.50, the approximate federal income tax is:

**Calculation:**
$$
\text{Federal Income Tax} \approx \$103.00
$$

**Explanation:**  
The federal tax is calculated based on the taxable wages and dependent credits using IRS tables.

---

## 7. **Calculate FICA Taxes**

### Social Security Tax

- **Rate:** 6.2%

**Calculation:**
$$
\text{Social Security} = 0.062 \times \text{FICA Wages}
$$
$$
\text{FICA Wages} = \$2,350.00 - \$133.00 = \$2,217.00
$$
$$
\text{Social Security} = 0.062 \times \$2,217.00 = \$137.65
$$

### Medicare Tax

- **Rate:** 1.45%

**Calculation:**
$$
\text{Medicare} = 0.0145 \times \text{FICA Wages} = 0.0145 \times \$2,217.00 = \$32.15
$$

**Explanation:**  
FICA taxes are applied to gross pay minus the Section 125 deduction.

---

## 8. **Calculate State Income Tax**

- **State Tax Rate:** 5.25%

**Calculation:**
$$
\text{State Income Tax} = 0.0525 \times \text{Taxable Wages} = 0.0525 \times \$2,146.50 = \$112.19
$$

**Explanation:**  
State income tax is calculated on the same taxable wages as federal income tax.

---

## 9. **Summarize Deductions**

| Item                      | Amount      |
|---------------------------|-------------|
| Gross Pay                 | \$2,350.00  |
| 401(k) Deduction          | \$70.50     |
| Section 125 Deduction     | \$133.00    |
| Advance Repayment         | \$500.00    |
| Federal Income Tax        | \$103.00    |
| Social Security           | \$137.65    |
| Medicare                  | \$32.15     |
| State Income Tax          | \$112.19    |

---

## 10. **Net Pay Calculation**

**Final Calculation:**
$$
\text{Net Pay} = \text{Gross Pay} - \text{Total Deductions}
$$
$$
\text{Total Deductions} = 70.50 + 133.00 + 500.00 + 103.00 + 137.65 + 32.15 + 112.19 = 1,088.49
$$
$$
\text{Net Pay} = \$2,350.00 - \$1,088.49 = \$1,261.51
$$

---

## **Final Net Pay**

$$
\boxed{\$1,261.51}
$$

---

### **Summary**

- **Gross pay** is calculated from the annual salary divided by pay periods.
- **Deductions** include pre-tax contributions and repayment of advances.
- **Taxes** are calculated based on taxable wages after deductions.
- **Net pay** is the final amount received after all deductions are applied.

> **Akila's net pay on the April 19 paycheck is \$1,261.51.**

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