How do I Calculate Deductions on Wage Salary?
Deductions on wages and salary can be involuntary or voluntary. Involuntary deductions are statutory, enforced by a government institution, such as payroll taxes and wage garnishments. Notably, payroll tax deductions include federal income tax, Social Security tax, Medicare tax and, if applicable, state or municipal income tax. Voluntary deductions are those that the company offers and that the employee consents to in writing. Deductions must be properly made to ensure compliance with payroll laws and adherence to company policies.
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Things You'll Need
- IRS Publication 15
- Form W-4
- Voluntary Deduction Rates
- State Employee Withholding Allowance Certificate
- State Withholding Tax Tables
Instructions
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Use IRS Publication 15/Circular E and the employee's W-4 form to calculate federal income tax. Check the employee's W-4 for his filing status and allowances. If he claims exempt, do not deduct federal income tax. But if he claims exempt and claims an allowance on the W-4, the form is invalid. If this is the case, return the invalid W-4 to the employee and request a valid one.
Claiming an allowance lowers taxable wages but it also means that these wages are subject to federal income tax. Since claiming exempt means that the wages are not subject to federal income tax, the employee cannot claim exempt plus allowances.
You will need the employee's gross wages or salary for the pay period to figure federal income tax. Consult the tax tables in Publication 15 to determine the amount to withhold.
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Deduct Medicare and Social Security taxes at 6.2 percent of gross wages, and 1.45 percent respectively. Once the employee reaches the annual wage limit of $106,800 (as of 2010), stop Social Security tax withholding for the year. This usually applies to highly compensated individuals paid on a salary basis. There is no cap figure for Medicare taxes.
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Calculate any required wage garnishments at no more than 25 percent of disposable pay--income after deductions. Typically, the garnishment notice tells you how much to deduct.
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Calculate voluntary deductions, according to pre-tax or post-tax status and according to company policy. Deduct pre-tax deductions, such as traditional 401k plans, medical benefits, parking fees and flexible spending accounts, before deducting taxes. This process lowers the employee's taxable income. Deduct post-tax deductions, such as life insurance, charitable donations, union dues, Roth 401k and disability insurance after deducting taxes.
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Tips & Warnings
If your state charges state income tax, deduct it using the employee's state withholding allowance certificate and the state withholding tax tables. Check for any municipal income taxes as well.
A salaried employee's take-home salary usually doesn't change from pay period to pay period unless she's had a deduction change or a pay adjustment.
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