Chapter 2 Understanding Your Paycheck
82
Check It
Jackson works as a ticket clerk for a passenger rail company. He earns $16.67
per hour. After his annual performance review, Jackson will receive a 4.25% raise.
If Jackson works 35 hours per week, how much more will he earn per week after
the raise?
Based on what you have learned in this chapter, it is probably no surprise
that a raise will aff ect your paycheck deductions. Therefore, you cannot assume
that a $1,000 annual raise in salary puts an extra $1,000 in your pocket. It is
important to be able to analyze the actual eff ect of a raise.
Most benefi ts are not aff ected by a raise. But federal withholding, FICA, and
state income taxes are aff ected by a raise.
Example 2-3C
See It
Ted works as a travel guide for a mountain resort, earning $15.72 per hour.
He is single and claims one withholding allowance. He works in a state with a
fl at-rate income tax of 4.63%. He will receive a raise of 5% of his hourly rate. Ted
is paid weekly, and works 40 hours in one week. Determine the actual amount of
Ted’s new weekly pay rate, after taxes and withholdings.
Strategy
Use the withholding tables shown in Figures 2-2 and 2-3, along with the
formula:
net pay = gross pay – (federal tax withholdings + Social Security tax +
Medicare tax + state income tax withholdings)
Solution
Step 1: Convert the percentage of a raise to a decimal by moving the decimal
two spaces to the left.
5% → 0.05
Step 2: Determine Ted’s new hourly wage after his raise. Multiply his current
hourly wage by the rate of raise. Then add the raise to his current hourly wage.
new hourly wage = hourly wage × rate of raise + hourly wage
new hourly wage = $15.72 × 0.05 + $15.72
new hourly wage = $0.79 + $15.72
new hourly wage = $16.51