Trying to explain why your employee’s checks are smaller than they expected can be complicated. Maybe you’re helping an employee understand their withholdings and deductions? This information will help.
These are the six most common types of payroll withholdings and deductions that you and your employees will run into, along with a few others to keep in mind.
Click to jump to any of the common types of payroll withholdings covered in this article:
Money taken out of an employee’s paycheck falls into two categories: withholdings and deductions. Withholdings are required by federal and state government, while deductions may be voluntary or court-ordered.
1. Federal Income Tax
The employee decides how much of each paycheck is taken out on their W-4 form for their federal income taxes. If they choose to withhold a lot, they could end up receiving a refund on their year-end taxes. However, if they should choose to pay too little, they will receive larger paychecks, but will end up paying the rest owed at the end of the year.
The amount employees owe to the federal government is calculated as a percentage of their income and based on their taxable income, marital status, and number of claimed allowances. To find out if you or your employee is withholding the right amount, see this IRS Withholding Calculator.
2. State Income Tax
State taxes are like the federal income tax. This tax pays your state’s government and the amount varies by state. Usually, state taxes are paid to the state in which the employee works. But in rare cases, when an employee crosses state lines for work, taxes are paid in the state where the employee lives.
The amount each person owes is calculated based on W-4, marital status, taxable income, and number of allowances. Like the federal tax, there is no employer contribution to state tax owed. Keep in mind, in cases where the employee is paid low wages and/or has a large number of personal exemptions, you may not have to withhold any amount for state income tax.
3. Social Security (FICA)
Social Security taxes, also known as FICA (Federal Insurance Contributions Act), requires that employees make contributions out of every paycheck. The amount an employee pays is based on their taxable income and pays to retirement and disability funds as well as family and survivors’ benefits.
In 2019, the law requires that employers withhold 6.2% of the first $132,900 (increased from $118,500) the employee makes in annual wages and salaries. Any amount above $132,900 is not subject to Social Security tax withholdings.
4. Medicare Tax (FICA)
Like the Social Security tax, Medicare sometimes appears as FICA on paychecks. Employers are responsible for paying both FICA taxes to the federal government.
Medicare tax helps pay for hospital care, nursing care, and doctors’ fees for people 65 years and older as well as for people who receive Social Security disability benefits.
Federal law requires that employers withhold 1.45% of the employee’s annual wages and salary. This percentage is applied to any salary no matter how large or small. There is also a Medicare surtax of 0.9% withheld from the employee on wages and salaries that exceed $200,000. For more information on the surtax, see IRS.gov.
Do you have a written authorization?
The rest of this list contains deductions. Make sure you have a signed authorization from your employee before taking out voluntary deductions.
5. Insurance Policy Deductions
For employees who participate in their employer-sponsored health, dental, or vision care plans, they will see a deduction on their paychecks of the amount they owe for the policy. Employees may also contribute to a health savings accounts (HSA) but their contribution is tax-deductible and grows tax-free from year to year.
6. Retirement Deductions
The same goes for employer-sponsored 401(k) or 403(b) retirement plans. Employees contribute pre-tax funds, which are deducted every pay period. With a 401(k) account the employee chooses the percentage of salary to contribute and how the plan manager invests that money. The 403(b) plan is similar but is usually offered by nonprofit organizations and some public-sector employers. Employees get to choose how much is contributed and where it is invested among the plan’s options.
Other Payroll Withholdings
There are plenty of other types of deductions you might see on an employee’s paycheck. These deductions may be voluntary or involuntary. If they are voluntary, make sure you have a signed authorization from the employee!
- Court-ordered garnishment. An employee may need to pay child support or repay other debts. Sometimes garnishments can include a small fee to reimburse your company for administrative expenses.
- Tax liens. Employees who owe back taxes may have additional money deducted from their check.
- Union Dues. Some union dues may be automatically deducted from an employee paycheck.
- Charitable Contributions. Employees may elect to deduct money for charitable causes like The United Way or Red Cross.
- U.S. Savings Bond Purchases.
- Money Owed to Your Company. An employee may owe money for uniforms, tools, loans, etc.
That’s it! Those are the top six most common payroll withholdings you might see on your employees’ paychecks. But payroll can be complex – don’t hesitate to get in touch if you need some additional support.