Typical Payroll Deductions
Typical payroll deductions are deductions that employers are required to make from employees' paychecks, either because the employees agree to it or the law requires it. Voluntary deductions are those the employee consents to, while involuntary or statutory deductions are those that a legal entity requires.
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Types
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Typical involuntary payroll taxes include federal income tax, Social Security tax and Medicare tax. The Internal Revenue Service collects these taxes and demands that employers withhold them from employees' income. Most states charge employees a state income tax, but a few do not: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. The state revenue agency collects state income tax.
Voluntary deductions vary by company. The most common include retirement and health benefits; life and disability insurance; and flexible spending accounts such for as child care expenses.
Significance
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Employers provide voluntary deductions as a benefit to their employees. For example, offering an employer-sponsored medical plan in which the employer pays a portion of the cost is an effective strategy to retain quality employees. Federal payroll taxes fund national programs, such as providing hospital and retirement benefits to qualified retirees and their dependents and funding law enforcement and foreign affairs programs. State income tax provides state funding for public programs including schools, hospitals and correctional facilities.
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Tax Calculations
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Employers give new employees a W-4 form and, if applicable, a state withholding allowance certificate to complete. These forms help the employer to determine the amount of federal and state income tax to withhold from the employee's paycheck. The employer uses the withholding form and the federal and sometimes state withholding tax tables to figure the tax. IRS Circular E has the federal withholding tax tables, while the state revenue agency has its own withholding tax tables. Some states use a flat percentage instead of a withholding tax table to figure state income tax.
The employer calculates Social Security tax at 6.2 percent of gross income, up to the annual wage base of $106,800. It calculates Medicare tax at 1.45 percent of all gross income.
Pre-tax and Post-tax
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Voluntary deductions that meet the requirements of IRS Section 125 are deducted on a pre-tax basis. These deductions, such as a traditional 401k plan and flexible spending accounts, are deducted before taxes are withheld, which lowers taxable wages. If the deduction does not qualify as pre-tax, it's post-tax. This means the taxes are withheld after the deduction is made. Examples of post-tax deductions include Roth 401k and medical plans that are not pre-tax.
Considerations
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The employer is responsible for making the deduction payment to the relevant institution. Wage garnishments and child support orders are subjective deductions; only the employee who is subject to the garnishment is affected. These types of deductions are statutory. Therefore, the employer must adhere to them.
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References
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