One of the most common problems we see involves families and employees misunderstanding each other when it comes to Gross Wages (the amount prior to tax withholdings) and Net Pay (the “take-home” amount after taxes have been withheld). Here’s what happens. The family makes an offer for a certain amount of compensation. They do not specifically translate the compensation into after-tax, “take-home” pay (because that’s not how it’s done in the professional world). Meanwhile, the employee – perhaps not experienced in professional payroll – wrongly assumes that the dollar figure offered will be the after-tax, take-home pay.

She accepts the job and all is well…until the first payday. Then the employee sees a paycheck that is smaller than what she expected. Now what!?! Not wanting to commit conspiracy to evade taxes, the family is left with only two viable options: 1) maintain the agreed-upon pay and risk creating a disgruntled employee who will probably start searching immediately for another job or 2) increase the gross pay enough to “cover” some or all of the employee’s taxes. This “gross up” option increases the total employment expense and can leave the employer feeling abused.

Regardless of which option the family chooses, the financial relationship feels unfair to one of the parties – making it highly likely that the family will soon be searching for a new employee.

The best remedy for this situation is to run payroll scenarios using our Employee Paycheck Calculator. You can print or email the scenarios, which include Gross Wages and Net Pay – so the employee knows exactly what the offer is before accepting the job.

General Guidance on Form W-4 Selections

If you or your prospective employee needs help determining how many allowances to choose on Form W-4, here’s a quick primer:

Allowances determine the amount of income taxes withheld. It is a crude estimate designed to help employees pre-pay most – if not all – of their income taxes each pay period so they are not hit with a huge liability at the end of the year. Because there are so many factors that affect personal income tax liability, it is not possible to manage with precision. In fact, the IRS says employees should allow for error of up to $500 — meaning you may get a refund of a few hundred dollars or you may be required to make a tax payment of a few hundred dollars. If you don’t like the idea of writing a check at the end of the year, then you should be conservative when you choose your allowances — a lower number of allowances will withhold more income taxes from each paycheck and, therefore, reduce your year-end liability. Conversely, a higher number of allowances will withhold less income taxes each paycheck and, therefore, increase your year-end tax liability. Once you have a tax history, it is easier to get closer to $0 by adjusting the number of allowances on Form W-4 to withhold a little less or a little more each pay period.

For new Breedlove clients, the appropriate state and federal versions of Form W-4 are available upon registration. If you or your employee have any questions, just give us a call.