What are Payroll Deductions
Written by Stephanie Glanville
Stephanie Glanville is the Marketing Manager of TaxBandits. She has several years of experience with IRS tax forms and the funtionality of TaxBandits. With a passion to help business owners better understand their IRS tax forms and filing, she aims to create content that is valuable and informative.
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Deductions are one of the crucial aspects of the payroll process. Without deductions, no paychecks are generated for the employee. Deductions create a great impact on payroll calculations. Employers must have a clear idea about the deductions and their types to have a smooth payroll process.
Let's explore the payroll deductions
Key Takeways:
- Payroll deductions refer to the sum of the amount detected from the employee's wages.
- Understanding the difference between Pre-tax and Post-tax.
- Deductions are classified into two major types: voluntary deductions and involuntary deductions.
- Voluntary deductions are deducted based on individual interests such as health insurance, dental insurance, etc.
- Involuntary deductions are deducted from the employee's salary based on federal and state taxes such as FICA, Federal income, State income, etc.
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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