In order to understand fully the amount of compensation that an individual is getting on every paycheck, it is necessary to understand the kind of payroll deductions that are done. Knowing the payroll deductions and why they are done is important to fully understand the compensation that one is earning. There are two types of payroll deductions, mandatory and voluntary. It is required to be knowledgeable about these deductions to satisfy the questions regarding the compensation and the net earnings.
What are mandatory payroll deductions?
In order to comply with the regulations enacted by the government, the employer is bound by law to withhold payroll taxes from the gross pay of an employee before the paycheck is issued. Employers who don’t follow the law on mandatory deductions can be risking lawsuits, fines and even shutting down their business. Employees need to understand and fully comprehend these mandatory deductions from their pay.
The mandatory payroll deductions for taxes are as under:
- Federal income tax
- State taxes
- Local (city or county) income tax is also deducted in certain areas. They may be in the form of school district taxes, state disability or unemployment insurance, community college taxes among others.
The second type of mandatory payroll deductions are in the form of FICA (Federal Insurance Contributions Act) taxes that comprise of:
- Social security taxes
- Medicare tax
Depending on the location of the employee, the tax rates may be different. However, federal tax rates are the same throughout the states for all taxpayers.
Processing such mandatory deductions from the gross pay of employees is a complicated and time-consuming process. To save both time and resources, you can check out the various features of Crest Payroll, exclusive payroll software for accountants that helps you to process payroll for employees working in multiple states with auto deduction of the respective state and local tax.
What are voluntary payroll deductions?
Voluntary deductions from payroll by an employer are not necessary as per the law, most employers carry out such kind of deductions as it is convenient for both them and their employees. Voluntary deductions from the gross pay comprise of items such as charitable contributions and also the contribution of the employee to the employer-provided healthcare, dental or vision insurance coverage.
Voluntary deductions also include different types of employer-sponsored 401(k) plans, which are paid pre-tax and a Roth 401(k) that is paid after tax. Another type of voluntary payroll deduction is regarding employer-sponsored life insurance. Most of the employers pay for the life insurance policy for their employees. However, employees can choose to have more coverage for themselves and their family if they choose so and this is deducted from their pay.
To know more about payroll deductions, click here.
What are garnishments?
Some employees may be legally bound to make a certain type of payments each time they are paid. These deductions are known as garnishments and are deducted after tax. Garnishments are the legal documents that require the employer to collect a debt that is owed by an employee. Employers are required to cut the specified amount in the form of garnishments and send it directly to the individual for which this deduction is made. A common type of garnishments is in the form of child support payments and tax levies (penalties on late tax payments), government loans or old tax bills. Private lenders can also garnish the earnings of an employee.
What is net pay?
In order to carry out mandatory and voluntary payroll deductions, the employer must first determine the gross salary of the employee, that was earned during the time period. The mandatory and voluntary deductions are subtracted from the gross salary by the employer and the figure that results is the net pay of the employee.
To calculate all the deductions from the gross pay of an employee is a complicated process. Each employee may have various type of deductions and the amounts involved may change from one pay cycle to another depending on:
- The total amount of earnings of an employee in that particular period
- The personal circumstances of an employee
- The voluntary contributions they choose to contribute to
All the above-mentioned points have to be checked before every pay cycle. If you are processing payroll manually, then you should set a significant amount of time aside for this purpose. If you have several employees, it makes more sense to use payroll software or use the services of a CPA who does the job for you. Crest Payroll is a payroll software for accountants that processes payroll automatically and free from error. Crest Payroll takes care of all the payroll deductions that are in the form of federal and state taxes, garnishments and voluntary contributions. To know more about this exclusive payroll software for accountants, you can click here.