Do you want more details regarding payroll deductions? You see them on your paycheck and knowing why they are made and what they are will help you in understanding your compensation.
Deductions from your payroll can either be voluntary or mandatory. Understanding the difference for these deductions will explain the reasons why your paycheck doesn’t match your salary. Its highly recommended to find an outsourcing company for your payroll as it will likely save you money in the long run.
Should you have more questions after reading this article, see your Human Resources department for clarification. If you pay for outsourcing contact you point of contact.
They will be able to address any questions you have regarding paycheck or payroll deductions and compensation.
Mandatory Payroll Deductions
By law, the employer has to withhold payroll taxes from any employee’s gross pay BEFORE issuing a paycheck in order to comply with government requirements. For employers who don’t make mandatory deductions required by law can face fines, lawsuits or even being put out of business. You only need to understand what’s happening as an employee.
For tax purposes, the following are the required payroll deductions:
- Federal income tax,
- State taxes, and
- Local (county, city) income tax withholding in certain regions. (Additional local taxes might include community college taxes, school district taxes, unemployment insurance or state disability taxes).
FICA (Federal Insurance Contributions Act) is the second group of mandatory payroll deductions for tax purposes which that include:
- Medicare tax withholding and
- Social security taxes
Your tax rates will vary from one state to another and even within cities of a certain state. The Federal tax rate is the same for all taxpayers in any state.
Voluntary Payroll Deductions
Most employers take voluntary payroll deductions even though they are not legally required to do so. Voluntary payroll deductions are a convenience for most employers.
In other cases, the voluntary payroll deduction is for the employee’s convenience.
Voluntary deductions are taken from gross pay and include charitable donations (like for The United Way) and the contribution to the employer from the employee for dental, healthcare or vision insurance coverage. Also included are:
Some voluntary deductions for retirement can be paid via the employee’s paycheck. This could include various plans from the employer like 401(k) that might or might not have employer match and is considered a pre-paid tax and a Roth 401(k) which is a post-paid tax.
Employer-sponsored life insurance is another typical voluntary payroll deduction. Basic life insurance for employees is covered by many employers. However, employees can choose to have extra coverage for themselves, their mates or family.
In order to take out voluntary or online mandatory payroll deductions, the employer has to determine the salary of the employee or gross pay which was earned for the time period. The employee’s net pay is determined when the employer subtracts the mandatory and voluntary deductions from the gross pay.
Since US tax laws can be very complex and fines can be avoided, an employer should check with an employment lawyer or the state’s Department of labor before hiring a new employee. Avoid problems by knowing what is required legally. The company’s accounting department is also another place to find out about deductions and payroll taxes.
We hope you have a better understanding of why your individual net pay might be lower than your gross pay and exactly where those deductions go.