Trying to explain why your employee’s checks are smaller than they expected can be complicated. Maybe you’re helping an employee understand their deductions? This information will help. These are the five most common types of payroll withholdings you and your employees will run into.
Gross income is your employee’s salary before anything is withheld, resulting in a net pay. Net pay is the take home amount, after taxes and any of these common withholdings are deducted.
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
Your state taxes are like the federal income tax. This tax pays your state’s government and the amount varies by state. 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.
See also: Employee Timekeeping 101
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.
Laws in 2015 require that employers withhold 6.2% of the first $118,500 the employee makes in annual wages and salaries. Any amount above $118,500 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 doctor’s 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 a certain amount. For more information on the surtax, see IRS.gov.
5. Insurance Policies
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. Health savings accounts or HSAs are similar but the employee contribution is tax-deductible and grows tax-free from year to year.
The same goes for employer sponsored retirement 401(k) and 403(b) plans. Employee contributions are made pre-tax and are deducted from every pay period. With a 401(k) account the employee chooses the percentage of salary to contribute and also chooses 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.
There are plenty of other types of deductions you could see on an employee’s paycheck. For example, there might be a court-ordered garnishment that you’ll need to factor in. This could be for many reasons like paying child support or repaying debts. Sometimes, garnishments will include a small fee to reimburse your company for administrative expenses.
Other voluntary withholdings might include:
- Union Dues
- Charitable Contributions
- U.S. Savings Bond Purchases
- Or payments owed to the company for the purchase of company merchandise.
These are the top five most common payroll withholdings you might see on your employees’ paychecks, including some others worth noting. Do you need help with your payroll operations? Visit our Payroll Services page or download our free ebook: The Benefits of PEO Payroll Administration.