Without the right knowledge on payroll, owners are at risk of under or over-paying employees. In both instances, this can result in serious trouble with the IRS, especially if mandatory dues were missed.

Given how important payroll deductions are, we’ve decided to help. We’ve outlined the four things all businesses need to understand about it.


1. What They Are

 

Payroll deductions are essentially an amount that is withheld from an employee’s paycheck each pay period. These amounts are voluntary (such as health insurance or 401(k) deductions) or they are mandatory ones required by law (such as federal and local tax and FICA tax).


2. They Can Vary

 

It is important to note that the amount deducted is not always the same. These deductions vary based on the employee’s withholding allowance, state, and local tax as well as the benefits available. So, new owners do not need to fret if their employee’s deductions are not the same as it is expected.

3. Mandatory Payroll Deductions

Mandatory deductions mean that owners cannot get out of deducting these from their employee’s pay. These are required by law (either federal, state, or local) and need to be submitted to the IRS (or other agency).

 

  • Federal Income Tax

 

One of the mandatory deductions that owners must make is for federal income tax. This amount must be deducted each pay period. The amount is regulated by the federal government and goes towards such things as education and community development. As for the amount, it varies depending on a person’s gross pay and the allowances they claim on their W-4. However, it tends to range from 10% to 37% of their taxable income.

 

  • FICA Tax

 

FICA tax is also regulated by the federal government. This deduction includes Medicare (and any Medicare surtax), and Social Security taxes. However, the amount deducted is a flat rate; for the Social Security portion, it is 6.2% that must be withheld. As for Medicare, 1.45% of an employee’s annual wages must be deducted with the Medicare surcharge tax only being applied when an employee’s wages reach $200,000 (or $250,000 for those that are married or filing jointly) at 0.9%.

 

  • State and Local Taxes

 

States and municipalities set amounts that must be deducted from an employee’s pay. These amounts vary depending on the state and local government. But only states do not have a state income tax. So, it’s best to check with a tax professional to see where your location stands. Especially since some states have a flat fee and others have a progressive system (based on brackets-based income).

 

  • Court-Ordered Deductions

 

The final mandatory deduction that owners should be aware of is court-ordered deductions. These deductions are not applied to every employee. However, for the ones that will need it to be, they are withheld amounts for things like child support and debt. These amounts will be laid out in a court order and will be mandatory for owners to remove from an employee’s pay.


4. Voluntary Deductions

 

Voluntary deductions are just that – amounts that are deducted from an employee’s pay voluntarily. These amounts vary based on the benefits a business offers and whether an employee chooses to participate in them. These deductions are also further designated as pre-tax or after-tax (depending on the benefit).

 

Some examples of voluntary deductions are health insurance and FSA accounts (medical dental or vision), retirement plans, life insurance, disability insurance, commuter benefits, stock plans, tuition or professional certifications (if the employer offers classes or certifications), or other job-related expenses (such as union dues, meals, or uniforms).

Ultimately, payroll deductions have serious tax implications for an employee and the employer. If you’re an employer, consider getting some professional help by speaking with us at 407-328-5001.

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