Paycheck Deductions: Everything You Need to Know

Almost 70% of employees pay more in payroll taxes than they do in income taxes. This can be jarring for new workers who aren’t prepared to see money taken out of their paychecks.

Even experienced employees may know that money gets taken out, but don’t understand how much or why the money is taken out.

Keep reading to learn everything you need to know about paycheck deductions so you can help your employees understand their paystubs.

Deductions vs. Withholdings 

Both deductions and withholdings are taken out of gross pay before a paycheck reaches the employee. Withholdings are to pay for the employee’s Social Security and Medicare contributions.

The amount withheld from an employee’s paycheck is determined by law. An employer is required to withhold this money from their employees’ paychecks and then submit the sum to the IRS.

Deductions vary from one employee to the next, based on the benefits and donations the employee has chosen. These amounts typically include healthcare, retirement, or another special fund.

It’s also the employer’s responsibility to process deductions based on the employee’s choices. If you have a paystub processing service such as Paystubs.net, then you’ll inform them of the deduction totals. Your paystub service will then handle the withholdings and deductions for you.

Social Security and Medicare 

You’ll need to deduct FICA taxes from your employees’ paychecks. This calculation is relatively straightforward, at 15.3% of the employee’s gross pay.

Half of this percentage (7.65%) is deducted from the employee’s paycheck. Then, as the employer, you’re responsible for paying the rest.

There’s also a Medicare tax deduction for your employees who have a gross pay of $200,000 or more. These employees must pay an additional 0.9%. As the employer, you won’t have to pay an additional tax.

State Income Tax 

Not all states require their citizens to pay state income taxes. If you live in Florida, Texas, Nevada, South Dakota, Washington, or Alaska, then you won’t have to worry about this deduction.

However, the rest of the states require employers to deduct state income tax liabilities from their employees’ gross pay. Determine the percentage for your state and then calculate it based on the employee’s gross pay.

Retirement

Do you offer your employees a 401(k) or another retirement plan? If so, then you’ll want to provide your employees with the ability to deduct contributions from their paychecks. This could be a percentage of their gross pay or a set dollar amount.

Health Insurance 

Many companies provide their employees with group health plan coverage. The company will supplement the cost for its employees. Then, the employees will pay a portion.

The total amount deducted will depend on the individual plan that the employee chooses.

Process Your Paycheck Deductions

By now, you should have a clear understanding of what paycheck deductions are. This can help you process your employees’ paystubs correctly. This will keep you in compliance with both federal and state law.

Check out the business section of our blog for more helpful articles like this one.