What are Payroll Deductions?
Payroll deductions are accounted for each payroll period and these are the amounts that are subtracted from an employee's gross pay.
These deductions can vary according to a state’s tax laws and how much withholding taxes are required. Watch the video on the right or continue reading the article to learn more.
Payroll calculations can be done manually.
Or you can opt to outsource a payroll provider. We’re going to get into the question of what are payroll deductions? And what types of remittances constitute these payments from your regular income.
Since automation makes things faster, it makes sense to use a tool that will help you record a payroll, this is true whether you are an employee or an employer who wants to report your income.
Online pay stub generators are one of the best tools to automate deductions.
What are the Two Types of Payroll Deductions?
Mandatory Deductions
Mandatory deductions are remittances which take place anyway, because they are government dues. These include your taxes and others which constitute government benefits for the employee.
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Federal income taxes
The amount which employers remove from their employee’s paychecks. These are dictated by the federal government and typically these go to government funds like defense and education.
The payroll deductions will also depend on how high their gross pay is and including allowances which will then be reflected on the W-4 forms.
Payroll services or pay stub generators can help calculate the approximate federal taxes per state. But you can also review local state laws or check the IRS website in case you want to be sure regarding the amounts.
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FICA
FICA is just like federal taxes but they constitute social security, Medicare, and maybe even Medicare surtaxes.
FICA taxes though have a flat rate that the government sets. For social security, then at least 6.2% of an employee's yearly wages need to be withheld.
For Medicare then that is 1.45% of the amount. Medicare FICA tax surcharges only apply if the employee’s wages reach about $200, 000.
If we don’t include the surcharges, employers are responsible for withholding at least 7.65% of employees' salaries.
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State and local taxes
Federal taxes are not the same as state taxes. Though they are similar. Some states and municipalities often require employees to pay income and other specific taxes to be remitted and employers have to account for these same deductions as well.
The requirements will vary in the states. There is also state who have flat income taxes like FICA and others have progressive income taxes.
You may want to review your state or local tax authorities to make sure your remittances are correct.
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Court-ordered deductions
If there are situations including child support or back pay then these amounts need to be withheld from an employee’s paycheck too. If any of these scenarios apply, then you need to withhold the proper amount. And all of these are ideally shown in the court order.
Garnishes are amounts that employees owe and if they’re earning, they’re required to pay them progressively over time. If you have any amounts that you owe it’s a good idea to settle them right away so you don’t have to catch up on your loans. The specific amounts which are withheld are typically outlined in their court order as well.
Voluntary Deductions
Voluntary payroll deductions are not mandatory. Yet they are still based on other benefits your employer may confer on you or is your prerogative of your employee to take advantage of.
If it comes to voluntary payroll deductions, employers may only withhold a certain amount – if they want an insurance premium for example. If they want $40 withheld for a fringe benefit for instance, that amount may need to be withheld from the employee's pay checks.
1. Health insurance premiums and Flexible Spending
It would depend on the options you choose. The specific plans and how much an employee will request for certain funds to be deducted from their account.
These accounts typically include:
- Vision
- Medical
- Dental
2. Life insurance
Though most employers can offer traditional life insurance, most employees can also opt for higher coverage. In the case of higher coverage, the employers deduct the right amount which the employees consent to.
3. 401k’s
Retirement plans including 401k’s or IRA’s are for employees who choose to have some of their money withheld and deposited into their specific retirement accounts.
4. Fringe benefits
These can include union deals, uniforms or perhaps meal stubs. Employees can choose to have these taken from their salaries if there are pre-packaged meals for instance, and it allows them to take advantage of these plans without necessarily having to dole out the money up front.
5. College or Post Grad Tuition
If your employees like to take classes and receive post graduate certifications such as a Master’s, then they can also have those things taken from their pay if your office facilitates their tuition. And if it happens from paycheck to paycheck they don’t have to worry about tracking their tuition payments because it has been well integrated into their deductions.
6. Disability insurance
This type of coverage is sometimes covered by employers. But if your company doesn't offer this, you may elect to have this deducted from your paycheck also.
7. Corporate stocks
If your company gives you the option to invest and be a shareholder, these deductions may be integrated into your payroll as well. This is great for people who are working but also are beginning to get into the habit of entrepreneurship or investing for residual income and shares.
8. Commuter benefits
You can also arrange your commuter costs with your employee by having these amounts deducted from your salary. Employers typically require the employee to outline what type of commutes they take on their day to day routines at the office.
Start Tracking your Income and Deductions
Take the first step in tracking your income and deductions by creating your own pay stub with our online paystub generator.
