Tuesday, March 21, 2006
Compensation: Gross vs. Net pay
Household employment is about they only kind of employment where the majority of applicants will state their salary requirements in terms of NET or take home pay instead of GROSS (before tax) wages.
This perplexes the majority of employers. What does the applicant mean? Do they want the employer to pay ALL of their taxes, including income taxes? If so, how does one calculate this given the vast array of personal situations. The housekeeping applicant who is single with two teenagers has a much lower tax rate than the married applicant with a working spouse and no dependents.
We advise families to work with the applicant to define a Gross or before tax wage and agree to that with the new employee. Why is this important?
1. The family who agrees to the take home salary net of all taxes has to make an educated guess as to the employee's tax situation. What other employer would ever agree to this? How many readers have ever completed a tax return that has a goose egg (zero tax due or refunded) as the bottom line?
2. The family who over-contributes the employee's income taxes has in effect given her a raise they didn't intend to give. The refund goes to the employee - never the boss.
3. The family who under-contributes gets asked by the employee at the end of the year to make good on any taxes due - an unexpected budgetary surprise for the family. And if the married housekeeper and her spouse owe taxes, who is to say that isn't because the husband didn't have enough tax withheld?
4. Many families will interpret the 'take home' wage request to mean a wage only after the required taxes have been paid. In household employment, this means the Social Security and Medicare taxes. The family then gives the employee a W-2 at the end of the year reflecting wages and the Social Security and Medicare taxees with no contributions made to income taxes. The employee then has to prepare her own tax returns and pay the appropriate taxes (and sometimes penalties if they haven't made estimated payments). We have seen many domestics promptly quit and find another job when this happens.
HomeWork Solutions will work with registered clients to compute a gross up salary, based on the net or take home pay request. Our recommendation is that the family look at that gross first from their budgetary perspective. Are they comfortable paying the married applicant $38K per year? Maybe their will look harder at the single mom who will only cost them $30K per year? Once the client is comfortable with a budget, our advice is to offer the job based on the Gross wage - and let the tax situation work out however it will.
Our free online tax calculator will help families 'play games' with different wage and withholding status scenarios.
For more information on this and other household employment tax issues, visit the HomeWork Solutions Inc. website.
Household employment is about they only kind of employment where the majority of applicants will state their salary requirements in terms of NET or take home pay instead of GROSS (before tax) wages.
This perplexes the majority of employers. What does the applicant mean? Do they want the employer to pay ALL of their taxes, including income taxes? If so, how does one calculate this given the vast array of personal situations. The housekeeping applicant who is single with two teenagers has a much lower tax rate than the married applicant with a working spouse and no dependents.
We advise families to work with the applicant to define a Gross or before tax wage and agree to that with the new employee. Why is this important?
1. The family who agrees to the take home salary net of all taxes has to make an educated guess as to the employee's tax situation. What other employer would ever agree to this? How many readers have ever completed a tax return that has a goose egg (zero tax due or refunded) as the bottom line?
2. The family who over-contributes the employee's income taxes has in effect given her a raise they didn't intend to give. The refund goes to the employee - never the boss.
3. The family who under-contributes gets asked by the employee at the end of the year to make good on any taxes due - an unexpected budgetary surprise for the family. And if the married housekeeper and her spouse owe taxes, who is to say that isn't because the husband didn't have enough tax withheld?
4. Many families will interpret the 'take home' wage request to mean a wage only after the required taxes have been paid. In household employment, this means the Social Security and Medicare taxes. The family then gives the employee a W-2 at the end of the year reflecting wages and the Social Security and Medicare taxees with no contributions made to income taxes. The employee then has to prepare her own tax returns and pay the appropriate taxes (and sometimes penalties if they haven't made estimated payments). We have seen many domestics promptly quit and find another job when this happens.
HomeWork Solutions will work with registered clients to compute a gross up salary, based on the net or take home pay request. Our recommendation is that the family look at that gross first from their budgetary perspective. Are they comfortable paying the married applicant $38K per year? Maybe their will look harder at the single mom who will only cost them $30K per year? Once the client is comfortable with a budget, our advice is to offer the job based on the Gross wage - and let the tax situation work out however it will.
Our free online tax calculator will help families 'play games' with different wage and withholding status scenarios.
For more information on this and other household employment tax issues, visit the HomeWork Solutions Inc. website.
