What are Payroll Deductions

Pre-tax vs post-tax: What’s the difference?

Pre-tax: Pre-tax is the taxes withheld from the employee's paychecks before any taxes are withheld. Pre-tax deductions reduce the taxable income so that employees can pay lower taxes for the year.

Post-tax: Post-taxes are the taxes withheld from the employee's paycheck after all the required taxes are withheld. They reduce the net pay of the employees, so the employees owe taxes on them.

Different types of payroll deductions

Payroll deductions can be categorized into two basic types:

• Voluntary deductions
• Involuntary deductions

How do payroll deductions work?

Payroll deductions are always processed for every pay period based on the tax laws applicable to them. The calculation can be done either manually or using automatic payroll software. Most businesses choose payroll software because it reduces errors while calculating payroll deductions. The amount that is withheld from each employee is based on Form W4(Employee withholding certificate), federal withholdings, and based on the rules provided in different states and cities taxes are deducted.

How do you calculate payroll deductions?

Payroll deductions can be calculated by using the following steps:

• Step 1 : (Essential employee document) - Employers must gather all the essential documents from the employees such as Form W4
• Step 2 : (Calculating the gross pay) - Gross pay contains all the deductions owed by the employee. Some deductions included in gross pay are total earnings before deductions, including wages, overtime, bonuses, or commissions.
• Step 3 : (calculate tax withholdings) - Calculate the federal and state income taxes are withheld from the employee based on the employee's earnings and using the information in Form W4. FICA taxes(Social Security and Medicare taxes) are withheld from employees based on the limits fixed by the federal.
• Step 4 : (Include all deductions) - Include all voluntary(Medical insurance, retirement plan) and involuntary deductions(federal and state tax income, FICA taxes) from gross pay
• Step 5 : (calculate the net pay)- Subtract all the deductions from gross pay to calculate the total net pay of the employee.

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