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adjustment to the base salary. That means the employee’s base salary is occasionally bumped up to cover a rise in the cost of consumer goods and services as indicated by the U.S. the Consumer Price Index which tracks such things. Gross Salary. A lot of money is deducted from a paycheck before it gets to the employee. These deductions pay for things like income taxes and employee benefits, which we’ll learn about in this and the next lesson. Gross salary refers to total earnings before any deductions are taken. Net Salary. Although salary is generally paid in 26 biweekly payments, the money that shows up on a paycheck does not equal 1/26th of the gross salary. Net salary is also called net pay or take home pay . It’s what’s left over after all deductions are taken for employee benefits and income taxes. Employee Benefits Employee benefits are an important component of a compensation package. These are non-cash or other forms of compensation paid to an employee in addition to the salary. There many different types of employee benefits. Some are required by law, others are offered at the discretion of the employer. Employee benefits can vary from state to state and from industry to industry, as we’ll see below. Benefits are a big deal because they can comprise about 25–33% of the total value of your compensation package. The higher you go in an organization, or the longer you stay with it, the bigger the role benefits play in your compensation package and the more they enhance your ability to build wealth and a secure financial future. When offered a job, examine the employee benefits in your potential employer’s compensation package as closely as the salary. The Benefit of Benefits. Benefits are called benefits for a reason! They are very beneficial to the lives of employees . In Unit 2, we delve more deeply into their role as tools for building wealth, but for now, understand that benefits work in a variety of ways to better the lives of employees: PRODUCT PREVIEW The Benefit of Benefits Reduce Tax Liability A big benefit of benefits is that the employee’s share of the cost is often deducted from their salary before income taxes are deducted. The ability to pay for benefits with pretax dollars reduces the employee’s taxable income. That reduces the amount of income taxes the employee has to pay. Many of the benefits provided by an employer, such as health, dental, and vision care insurance would be too expensive for a person to purchase as an individual. By participating in the employer’s group insurance plan , employees are able to take advantage of the lower costs afforded to large groups. Cheaper Insurance Build Wealth Saving money for retirement is not easy. People give into the temptation to spend, or savings are eaten up by unexpected expenses. Retirement plans are popular employee benefits that whisk away money in small, unnoticeable amounts. Over several years an employee can build a healthy retirement fund. You’ll learn all about retirement plans in a later chapter. Improve Quality of Life Employee benefits are designed to improve an employee’s quality of life , such as the ability to
stay home when you’re sick or take time off to care for a newborn or sick family member without having to worry about losing your job. This also benefits the employer because happy employees are more productive on the job and less likely to quit.
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Chapter 4 | Pay. It’s More Than a Salary
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