Payroll

Guide

Everything You Need to Know About Payroll Deductions

Employers know that there are some non-negotiables they must incur if they are to remain in business. These include having systems in place, a well created enthusiastic and loyal team, and paying taxes as required. Taxes tops the list of items that cannot be ignored. In addition to the taxes they will pay for their general operations, there are also tax and other deductions that need to be made from employee pay checks. It can get confusing when calculating, as there are pre-tax deductions and post-tax deductions. There are other non-tax related deductions as well to be considered. So, what are paycheck deductions?

Employees earnings are divided into two main categories. There is the gross pay which is the total amount that they earn for the job that they do. Then the take home pay, which is what the employee actually receives once their necessary deductions have been taken out. From the payroll, there are voluntary as well as mandatory deductions.

Breaking Down the Required Payroll Deductions

Employers must ensure that they withhold some specific payroll taxes and have these submitted to the relevant tax agencies. There are known as statutory deductions. If these are not paid as expected, then the employer may face some penalties as well as fines. The main mandated taxes are the FICA tax and the Federal Income Tax. These are reported using two forms being Form 941 and Form 944 respectively.

The FICA tax includes two key components, which are social security and Medicare taxes. They are calculated using a percentage. With social security, a total of 6.2% is deducted for tax, while Medicare tax comes to 1.45% of the employee’s taxable wages. This means that the total amount deducted from the paycheck in FICA tax is 7.65%.

It is worth noting that the state and local taxes will vary as every state has its own structure for income tax. These capture a myriad of taxes such as state disability, school district taxes, unemployment insurance and more.

There is an electronic system that has been set up for these tax submissions, and it is known as the Electronic Federal Tax Payment System (EFTPS). The mandatory deductions also include state and local taxes.

In addition to the mandatory payroll deductions, there are also voluntary payroll deductions. These deductions require the consent of the employee and result in additional benefits. They include health insurance premiums, retirement plans, life insurance premiums and other job-related expenses. The reason that these rates are voluntary lies in their variability as well. Mandatory deductions seem to have fixed rates based on the stipulations from the state and local governments.

Post-Tax Deductions

The above deductions apply for pre-tax, though there are some post-tax deductions. These include retirement funds, union dues, charitable donations as well as wage garnishments. Garnishments are often court ordered to ensure that debts are cleared. The others can be made in agreement with the employer.

Companies need to get taxes right, as the ramifications are very serious. To do this, it is necessary to include an expert in this area, to make sure that there are no errors.

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