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An Ultimate Employer Guide to Understanding Payroll Deductions

Written by Stephanie Fortune

Hi, My name is Stephanie! I am passionate about helping small and medium-sized businesses empower themselves and their employees while working to achieve their strategic goals! By reviewing your unique business needs, we implement Payroll, Insurance, and HR solutions that are right for you!

October 11, 2022

When you are running a business, apart from paying payroll taxes, you, as an employer, are also obligated to withhold some amount from your employee’s pay as payroll deductions. However, to ensure you are processing it efficiently and correctly, you need to understand the basics of payroll deductions. 

Are you interested? Then read further to know about it!

What Are the Basics of Payroll Deduction?

There are two types of deductions. One is voluntary, which you can deduct from your employee’s paycheck only if you have a written authorization certificate. Some examples of it include 401(k) and health insurance deductions. The second is mandatory by law, such as FICA and federal income taxes. 

However, not all employees are liable for these deductions. In other words, independent contractors do not need to get their payments deducted. 

Now, before moving into a deeper understanding of several deductions, you must understand there are two basic categories of deductions, i.e., pre-tax deductions and post-tax deductions. 

What Are the Types of Deductions?

There are two basic categories of deduction under which there are several other types of applicable payroll deductions:

  • Pre-Tax Deduction: The amount employers deduct from the gross salary before calculating the tax is called pre-tax deduction. This helps employee decrease their taxable income. 
  • Post-Tax Deductions: The amount employers deduct after calculating all the taxes are called post-tax deductions. 

The salary the company calculates after considering these pre and post-tax deductions is the take-home salary of employees. Other payroll deductions further categorized under pre- and post-tax deductions are discussed below. 

What Are the Mandatory and Voluntary Payroll Deductions?

As discussed, there are certain amounts that employers must deduct mandatorily as specified by law, while there are other voluntary deductions employers make to benefit their employees. The classifications are:

  • Mandatory Deductions

These are standard payroll deductions that are mandatory under law and usually make up the pre-tax deductions:

  • Federal Income Tax

The payroll deduction you make from an employee’s paycheck as federal income tax depends on the gross pay and the allowance stated in Form W-4. This federal income tax amount ranges from 10% to 37% of the taxable income.

  • State Income Tax

All nine states have to pay income tax on employee earnings. It is either against all income at a fixed rate or contains multiple brackets. Also, your payroll system must be able to calculate state income tax depending on the area your employee lives in, their type of employment and other criteria.

  • FICA or Federal Insurance Contributions Act Taxes

FICA is generally applicable to Medicare and Social Security employees. Here, Social security costs 6.2% up to $ 147,000 in 2022, while Medicare costs 1.45%. In addition, it can also include a Medicare surtax of 0.9%. 

However, the surtax only applies if an employee’s wage reaches $ 200,000 ($250,000 for employees filing jointly or married). Moreover, the surtax is applicable only on the exceeding amount. Also, remember, as an employer, you are liable to withhold at least 7.65% of your employee pay, excluding Medicare Surcharge. 

Voluntary Deductions

These are post-tax deductions. Some of its examples are:

  • 401(k): It is a retirement plan containing employee contribution whose limit is up to $ 20,500 in 2022.
  • Health Insurance Premiums: Depending on the type of health insurance a company offers, like vision, dental and medical, employees can contribute to their FSA account. 
  • Wage Garnishments: The government can issue a wage garnishment order if an employee has an unpaid debt. It can be in the form of student loans, child support, alimony, and credit card debts. Here the limit that needs to be garnished will depend on the type of debt. 

Take the above deductions into consideration when calculating the payroll of employees. If you find it difficult, considering there are so many things to remember, you can always take the help of a professional service provider. For assistance, contact us!

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