How to Calculate Payroll Benefits

Benefit deductions occur on a pretax or post-tax basis.

Employers are not bound by law to offer payroll benefits to employees. Consequently, payroll benefits vary by employer. More commonly, employers offer medical, dental, life and disability insurance; retirement plans; and benefit days, such as vacation, personal and sick days. Benefits, such as vacation and sick days are paid to the employee; others, such as retirement contributions and health insurance, are deducted from the employee's wages. The calculation method depends on the benefit and the employer's policy.

Instructions

1. Distinguish between pretax and post-tax benefit before deducting the benefit. Pretax benefits are those that satisfy the criteria of IRS Section 125. Deduct them from wages before withholding payroll taxes. This process reduces the employee's taxable wages and gives her a tax break. The only way an employer can give this tax break is through a pretax benefit, such as a traditional 401(k) or a Section 125 medical or dental plan. If the benefit is not pretax, it's post-tax. Deduct post-tax benefits from the employee's pay after withholding taxes---this process does not lower taxable income.

2. Make benefit deductions according to employer policy. The employer's 401(k) plan document, for example, may require employees to contribute a minimum of 3 percent of gross income with the employer agreeing to match up to 5 percent. Health insurance premiums depend on the provider's rates, the amount the employer decides to contribute and the employee's pay frequency. The employer, for example, may agree to pay 80 percent of the cost. Therefore, you would deduct the remaining 20 percent from the employee's wages each pay period.

3. Stay abreast of the IRS' regulations concerning annual limits for 401(k) accounts. For 2011, an employee can contribute up to $16,500 toward a traditional or safe harbor 401(k) plan, and up to $11,500 toward a SIMPLE 401(k) plan. An employee age 50 or older can contribute an additional $5,500 toward his traditional or safe harbor 401(k) plan, and an additional $2,500 toward a SIMPLE 401(k) plan.

4. Pay vacation, sick, and personal time at the employee's regular pay rate. If the employee incurs overtime due to a benefit day, pay the excess hours at her regular pay rate. The employee, for example, works 37 regular hours and takes eight sick hours. Pay all 45 hours at her regular pay rate.

Tips & Warnings

• If a wage garnishment applies, deduct payroll taxes and pretax benefits from the employee's gross pay to arrive at the disposable income---the amount subject to garnishment calculation.

References

• Social Security Administration: Determining an Employee's Disposable Pay for AWG
• IRS: FAQs for Government Entities Regarding Cafeteria Plans
• U.S. Department of Labor: Overtime Pay
• IRS: 401(k) Resource Guide - Plan Participants - Limitation on Elective Deferrals
• U.S. Department of Labor: Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA)

Resources

• IRS: 401(k) Resource Guide
• U.S. Department of Labor: Fact Sheet #17G