How to Calculate Taxable Wages

Have you ever wondered what makes up taxable wages? If so, you’re not alone.  Hopefully this post will help clarify what to consider when calculating taxable gross for payroll.

For the example listed below, we will be calculating the taxable gross for Federal income tax (keep in mind that taxable gross varies depending on tax type).

Remember this formula when calculating taxable wages:

  • Gross – Non taxable earnings – pretax deductions + taxable benefits = taxable gross

The following data has been taken from a sample pay stub:

  • Earnings—  Salary Wages: 1500.00,  Mileage: 18.35
  • Employee Deductions—  Health: 45.29,  401k: 40.69
  • Employer Paid Benefits—  Auto Allowance: 25.00

1. Begin with gross wages
Start with your total income before taxes and deductions are withheld.

  • 1500. + 18.35 = 1518.35

2. Deduct non-taxable wages
Now what? Well, not all wages are taxable and therefore would need to be deducted from the calculation of taxable gross (an example would be mileage or other expense reimbursements). If applicable, subtract these from gross wages.

  • 1518.35 – 18.35 = 1500.00

3. Look at your deductions
Some are pretax deductions and will be subtracted from the amount in step 2 above prior to calculating taxes. (Examples: contributions made to a cafeteria plan or 401k).  If any of this applies, subtract the amounts withheld from your gross wages.

  • 1500.00 – 45.29 - 40.69 = 1414.02

**Remember: what may be considered pretax for Federal withholding (our example) may not be considered pretax for other tax types such as FICA OASDI, Medicare, state withholding, etc.

4. Add employer provided benefits
Are there any employer provided taxable benefits that would be considered taxable? (Examples: might be personal use of an auto or group term life greater than $50,000) If applicable add these amounts to the result above in step 3.

  • 1414.02 + 25.00 = 1439.02

The result above represents your taxable wages.  The same calculation would be made for each type of tax applicable to the employee before applying the tax calculation for the employee’s withholding amounts. 

To learn more tips and advice on payroll & tax processing, read Optimum’s Payroll Blog. To automate and make payroll even easier, request a free demonstration of Optimum Payroll Software and see how it can improve your process today.

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