It is extremely important that from the beginning, all discussions about wages between household employer and household employee clearly state whether the pay will be gross or net wages. Many nannies and employees who work in the home are not aware of the tax deductions that are necessary for them to be legal and may have worked “off the books” by receiving cash only when paid for their work. From the employer perspective, an employer just wants to know the total cost of hiring an employee. For the worker, they want to know what money they will be taking home at the end of the week. Employers do have a greater risk when using net calculations to pay employees as the employer is responsible for all taxes. Also, the tax amounts can change with tax law changes or if the employee chooses to increase or decrease their withholding amount.
Example #1: Talking in gross pay terms
When gross pay is agreed to, the necessary withholding taxes (Social Security, Medicare, state and federal) will be deducted from this gross wage. The remaining amount is the net that is paid to the employee. So, if the gross pay is $500, the employer would pay the employee $500 of gross, less the tax deductions from tax (approximately $105 a week). This would result in the employee’s take home, or net pay, as being $394.51.
The employer then has to remember that there are additional employer taxes to be paid on top of the gross pay of $500 (unemployment, matching Social Security and Medicare) which calculate to be about $62.75. When this is combined with the gross $500, the total employer responsibility is $562.75, in order to pay the employee $394.51 a week.
Example #2: Talking in net pay terms
Net calculations begin with an agreed-upon net or take home pay, which then has to be “grossed up” by the employee’s Social Security, Medicare, withholding taxes, and other mandatory deductions. For example, using a net calculation of $500 agreed upon by employer and employee would mean that the employee would take home $500. When this is ‘grossed up’ by the employee’s taxes, there is a gross payment of $645.
For the employer, there are then the employer taxes on top of that $645 (federal unemployment tax, Social Security, Medicare, state unemployment) which would add up to $80.95. This has to be added on to the gross wage of $645 to give a total employer responsibility of $725.95.
Example #1 with a gross pay of $500 creates an employer’s total responsibility of $562.75.
Example #2 with a net pay salary of $500 creates an employer’s responsibility of $725.95.
Employers who do not understand the difference between gross pay and net pay could potentially find themselves in a situation where they are paying an additional $163 per week! Therefore, it is important to know the differences prior to negotiating your compensation with your employee.
Use our tax calculator to help you find out what your employee’s taxes, standard hourly rate of pay, and their overtime hourly rate of pay will be based on either gross or net wages. For more information, please contact GTM’s Household Employment Experts at (888) 432-7972.