When it comes to calculating your employees’ paychecks, it is important to ensure that all the necessary deductions are applied. If not, the amount issued will be inaccurate, the checks will need to be amended/reissued, and you could even be penalized if the issue remains unaddressed. Fortunately, miscalculations can be easily avoided by using reputable payroll software, but if your company currently manages payroll using manual processes, you will want to pay close attention to this abbreviated list of deductions below!
The most common types of deductions are involuntary deductions. Employees cannot opt out of paying these deductions; they are mandated by either federal, state, or local tax authorities.
- Federal – Every employee working in the United States is required to pay federal income taxes. The percentage deducted will depend on which tax bracket the employee falls into, with the lowest bracket being an annual income of less than $9,875, and the highest being an annual income exceeding $518,401. Joint filers have similar (but different) federal income tax requirements. You can find a complete list of the current tax brackets and rates here
- State – Income tax varies by state. Some states (such as Florida) do not have an income tax. On the other end of the spectrum, the record for the highest current state income tax in the United States goes to California (at 13.3%).
- Local – The local government may impose an income tax as well. These tax rates (and what the funds will contribute to) vary by locality.
FICA (Federal Insurance Contributions Act) taxes are another deduction taken out of every American worker’s paycheck. Taxed at a rate of 7.65%, 1.45% of the withheld funds go towards Medicare. The remaining 6.2% goes to Social Security. The employer is also required to match these contributions, bringing the total collected between employee and employer to 15.3% each paycheck.
SUI (State Unemployment Insurance)
In the vast majority of states, only the employer is required to make contributions towards SUI taxes. However, in Alaska, New Jersey, and Pennsylvania, employees are required to pay SUI as well. The Alaskan SUI tax rate currently sits at 0.50%. New Jersey employees are responsible for contributing 0.425% of their paychecks, and Pennsylvanian employees are on the hook for 0.06%.
If an employee falls behind on their child support payments, you may receive an IWO (Income Withholding for Support) form. The amount you will need to withhold will vary based on the employee, but fortunately, the amount will be provided for you on the IWO. The IWO will also tell you where to send the withheld payments to.
Retirement Plan Contributions
Employees can opt to set aside income from their paychecks for their retirement funds. These contributions may be pre-tax or after-tax depending on the plan they choose. Common pre-tax plans are 401(k) plans and traditional IRAs. The Roth IRA is a popular after-tax choice for future retirees. For 401(k)s, the yearly contributions are limited to $19.500 per year (with a catch-up limit of $6,500 between 2020 and 2021 for employees over the age of 50). For both traditional and Roth IRAs, the yearly contributions are limited to $6,000 per year (or $7,000 for workers over the age of 50).
Health Insurance Premiums
If your company offers health insurance, some employees may choose to enroll. If they do, health insurance premiums will need to be deducted from their paychecks. However, the exact amount deducted will vary depending on their choice of health insurance plan, so expect to calculate different rates for different employees.
Some employees may choose to fund their future medical bills now rather than later. This is done by making FSA (Flexible Spending Account) contributions, which are currently limited at $2,750 per calendar year.
As you can see, there are many different types of payroll deductions. Managing and calculating all these various deductions can be incredibly time-consuming, which is why many employers are opting to use payroll software rather than attempting to manage payroll themselves. However, if you do decide to manually manage your payroll, we strongly recommend you take the time to research all applicable taxes and deductions to avoid revisions and penalties later. It may be a pain but considering all the money it could potentially save you, it is certainly well worth the effort!