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Complete Guide to Payroll Deductions: Find All Details Here!

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!

February 7, 2023

Are you aware of what are the rules for payroll deductions in the US and how companies calculate them? Understanding the components of the payroll will help one to comprehend the finances associated with any business. Furthermore, this will help all employers comply with laws and payroll deductions.

This write-up serves as a comprehensive guide to answering all your queries regarding payroll deductions.

What Is a Payroll Deduction?

Payroll deductions are specific amounts that a company deducts or withholds from your paycheck in the form of voluntary deductions or taxes. All these payroll deductions examine your net pay or the take-home pay after deducting the specific amount from your gross income.

Now, let us understand the applicable payroll deductions in the US.

What Are the Applicable Payroll Deductions in the United States?

Some of the applicable payroll deductions in the United States include the following:

Pretax Deductions: 

These deductions are made from an employee’s paycheck before withholding any taxes. It reduces taxable income and the money one owes to the government since they are excluded from gross pay. Moreover, they reduce one’s Federal Unemployment Tax and state unemployment insurance dues.

Statutory Deductions: 

These deductions by government agencies are mandatory and employees require paying them for public services and programs. These include Federal Insurance Contributions Act tax and state income tax. One needs to understand the work status of an employee in order to file it properly.

  • Federal Insurance Contributions Act (FICA) Taxes: These taxes support medicare and social security. Moreover, employees require to pay social security tax at a rate of 6.2%. However, this includes a salary-based contribution limit. Additionally, they need to pay medicare tax at a rate of 1.45% without any cap.
  • Federal Income Tax: The federal government includes 7 income tax brackets which range from a marginal rate of about 10% to 37%. Here government first charges employee’s wages at the lowest rate till they reach a bracket and continue to charge at every rate till they reach their highest tax slab or total gross income.
  • State and Local Tax: These income tax laws vary since some areas charge a fixed rate against all income and others consist of several tax brackets. Additionally, some include few charges or no income tax at all.

Post-Tax Deductions: 

Employers charge post-tax deductions from an employee’s paycheck after withholding all required taxes. However, post-tax deductions do not lower an employee’s overall tax burden as these taxes do not reduce net pay rather than gross pay. Some examples of post-tax deductions are IRA retirement plans, union dues, charity donations, wage garnishments, etc.

Wage Garnishments: 

Regulatory agencies and courts might ask an employee to withhold a section of their post-tax or net wages. This is to cover child support, default loans, alimony, or any unpaid tax.

Voluntary Deductions: 

Employees might also opt to take out more money from their paychecks so as to cover the cost of several benefits. One can withhold these deductions on a pretax basis or post-tax basis. Voluntary payroll deductions include health insurance, group term life insurance, retirement plans, and various job-related expenses.

So, let us now understand how can an employee ensure accuracy in payroll deductions.

How to Assure Accuracy in Payroll Deduction Process?

Since payroll calculation is a challenging job, there are chances of inaccuracies and mistakes, which might further lead to penalties and litigations. Companies can opt for systematic processes and technologies to ensure proper payroll calculation. These systems will manage the following:

  • Salary Calculation
  • Loan and Advance, Reimbursement, Over Time Management
  • Full and Final Settlement
  • Bonus Calculation
  • Proof of Investments and Tax Declarations
  • Pay Slips 
  • Gratuity Calculation
  • Increment Process, and many more

It is crucial to educate yourself with this information which will help you do further financial planning. If you are looking for professional assistance to help with payroll, please contact us. Also, explore our blog section if you are interested in learning about similar topics!

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