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.