Learn These Types of Payroll Deductions

Learn These Types of Payroll Deductions (1201 x 601 px)

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Types of payroll deductions business owners should know

Running payroll is literally a system of checks and balances. Making sure that your employees get the money they deserve on time can be a tricky process at times, especially as you try to keep your organization’s accounting spotless. And without a healthy handle on accounting for accurate payroll deductions, you might bring unnecessary trouble upon yourself and your employees.

We created a handy guide detailing the basics of payroll deductions, hopefully reducing any stress or confusion you may be facing.

What are Payroll Deductions?

Payroll deductions are any wages withheld from an employee’s paycheck in order to pay federal and state taxes, garnishments, and benefits (such as health insurance). This is what distinguishes gross pay, an employee’s total earnings before deductions, from net pay – the total amount an employee ‘takes home.’

The most common payroll deductions include income tax, social security tax, retirement plan contributions, wage garnishments, and child support payments.

Some deductions are voluntary, and may be taken out pre-tax, meaning taxes won’t affect the amount deducted for that particular deduction. Examples of these types of deductions include health insurance, group-term life insurance, retirement plans, and job-related expenses.

Read more: Payroll Services for Small Businesses: A Business Owner’s Guide

How Do Payroll Deductions Work?

The amount withheld from an employee’s paycheck, either manually or automatically with a payroll service provider, depends on the information provided on his or her W-4 form, state and local withholding certificates, opted benefits, applicable tax laws, court orders, and so on.

These factors differ from state to state, so be sure to know the regulations within your particular area of business, as well as the areas in which your employees may be working (if not in the same location). Some states don’t require an income tax!

What are the Mandatory Payroll Deductions?

Each payroll cycle that your business runs must include mandatory state and federal payroll deductions from employee paychecks. Taxes are withheld and accrue over the year until you submit your final tax report at the end of the tax year. Any discrepancies must be trued up.

  1. Federal tax withholdings include Social Security and Medicare, and are determined by an individual’s taxable income, marital status, frequency of pay, and claimed allowances. Social security tax is withheld from the first $118,500 of an employee’s taxable wages at a flat 6.2%, and is matched by the employer for a total of 12.4%. Similarly, self-employed individuals pay the full 12.4% of their net earnings.
    Medicare is taxed at a flat rate of 1.45% per employee, and is uncapped. Both of these payroll deductions will show up on FICA and can be determined using an IRS Withholding Calculator.
  2. State and local tax withholdings are also calculated using taxable income, claimed allowances, and marital status. Each state maintains its own updated tax changes, and a few states require unemployment tax as well as disability insurance withholding. Your local taxation may also include city or county taxes individually.

These are the two mandatory payroll deductions for every organization, but they may not be the only ones that need to be carefully tracked each payroll cycle. It is extremely common for there to be withholdings accrued by certain organization types, pay structures, and wage laws.

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Other Types of Payroll Deductions

Some payroll deductions are not mandated at the state or federal level, and are relatively common across organizations. Additionally, tracking, reporting, and accounting for them on your year-end tax return is vital, so make sure to itemize these correctly:

Health Insurance

  • Health insurance may include medical, dental, or vision benefits covered by your employer.
  • Some employers also offer short or long-term disability coverage for employees.

Life insurance

Life insurance is often offered by employers, especially on top of basic health benefit plans.

These plans typically include:

  • Supplemental or Dependent Life Insurance Plans.
  • Accidental Death & Dismemberment (AD&D)
  • Registered Retirement Savings Plan (RRSP)

Make sure that when you are offering additional insurance options that you research their impact on your payroll deductions. If you are unsure about how to do this, ask your accountant or outsourced payroll professional for help setting up your deductions.

How to Do Payroll Deductions for Tax Purposes

At the end of each fiscal year, the IRS allows you to claim a deduction off your federal tax return, whereas any state income tax deductions are only obtainable if you are eligible to itemize deductions on a federal return.

This requires you to have documentation of your total annual deductible expenses that exceed the standard deduction amount for your filing status. As an individual or a business owner, this can be a crucial part of covering past expenses or charges. Having a dedicated payroll company like PayTech at your side can help make managing deductions a simple task.

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Get Payroll Tax and Accounting Help with Paytech

At Paytech, we take pride in helping businesses keep as much of their hard-earned money as possible. We do this by offering software that makes payroll management easy, while also employing specialists who have decades of experience advising organizations on the best way to optimize their payroll and tax setups.

Avoid losing cash this year and relieve some stress by reaching out to our business payroll services for a consultation. We’d love to help!

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