6 Common Types of Payroll Witholdings and Deductions

6 Common Types of Payroll Withholdings and Deductions

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!

Involuntary Deductions

  • 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.

Voluntary Deductions

  • 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.

 

Do you need help with your payroll operations?

Employers Resource can help, so get in touch with us today! We would love to talk to you.

Or, for more information about what we can do for you, visit our Payroll Services page or download our ebook: The Benefits of PEO Payroll Administration.

10 replies
  1. Alice Jones
    Alice Jones says:

    This is my first week getting paid at work and I noticed that $100 was gone from my paycheck. I didn’t know about the different common types of payroll withholding. It’s interesting how you explain how we have to pay both state and federal taxes. At least we’ll get the social security back when we retire.

    Reply
  2. Taylor Bishop
    Taylor Bishop says:

    I just wanted to thank you for going over some different payroll withholdings. It’s good to know that the amount of state income tax is based on someone’s W-4 among other things. I’m kind of interested to learn more about this and how these different considerations can affect the amount.

    Reply
  3. Martin flores
    Martin flores says:

    I got 378.00 taken from my check labeled as “advances payments” whar is that? Never got an advance from company in fact they owe me more money than that. What can i do?

    Reply
  4. Ranada Mclaughlin
    Ranada Mclaughlin says:

    Is there a certain order in which taxes are deducted from your paycheck. Example: Is Social Security first then Federal etc.?

    Reply
    • Employers Resource
      Employers Resource says:

      Patty, that could be a number of different things. Best thing to do is contact your HR rep and ask for more information on that deduction.

      Reply
  5. Sandra Patterson
    Sandra Patterson says:

    Thank you for explaining that the state income tax pays for the state’s government where you are working. I was wondering about the different things that are taken out of my paycheck every month. My sister is going to be doing her own taxes for the first time, so I will be sure to forward this to her so that she can know what to expect from that when her return comes around

    Reply
  6. Kenna Cate
    Kenna Cate says:

    You seem to be missing SDI – State Disability Insurance. In California, we pay a small percentage to ensure that we have coverage in the event that we are out of work due to illness or disability. Four other states, also have state disability insurance: Hawaii, New Jersey, New York, Rhode Island, as well as Puerto Rico.

    Reply
    • Employers Resource
      Employers Resource says:

      Hello Lisa,
      Since each company differs in their deductions, we always recommend reaching out to your HR department for an explanation of what each one is. The 6 most common ones are listed in this article, but as you can see, there are many more that not every company deducts from payroll.

      Reply

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