As a business owner, you are responsible for ensuring that payroll withholdings are performed on time and correctly, even if you use a payroll service. These deductions are calculated each pay period and include mandatory withholdings – such as federal, state and local taxes, as well as FICA (Medicare and Social Security) – and voluntary deductions, like health insurance premiums and 401(k) contributions.
Payroll deductions are amounts withheld from employees’ paychecks each pay period to cover expenses such as federal, state and local income taxes, as well as employee benefits, like health insurance. These amounts are deducted from each employee’s gross pay to calculate their net pay each pay period.
Here are some common examples of payroll deductions:
Payroll deductions are taken from employee paychecks every pay period. These amounts are calculated for each employee based on their gross earnings for that pay period, potentially with taxes based on an estimate of the employee’s annualized income. Amounts withheld from an employee’s paycheck are then paid on their behalf to taxing authorities, insurers or other recipients.
Every time an employer runs payroll for their employees who worked during the pay period, each worker’s deductions are calculated based on their earnings. Deductions are then made for income taxes, FICA, garnishments and any other mandatory items, as well as for benefits such as health insurance and retirement plan contributions.
Because deductions are based on an employee’s earnings for a particular pay period, it’s important to understand payroll frequency. To learn more, check out our guide to deciding how often to run payroll.
Payroll deductions fall into two general categories: mandatory and voluntary. Mandatory deductions are for payroll taxes, such as income tax and FICA, while voluntary deductions are for benefits such as health insurance and retirement plans.
Here are some typical mandatory payroll deductions:
In certain circumstances, there may be other distributions that employers are required to deduct on the employee’s behalf.
Here are some common voluntary payroll deductions:
The amounts of both mandatory and voluntary deductions can vary over time, though mandatory deductions don’t change much as a result of employees’ decisions, except for altering their number of withholding allowances. Amounts of voluntary deductions, however, can be adjusted.
Certain things should not be deducted from an employee’s paycheck. For example, employers are responsible for unemployment insurance (FUTA) and workers’ compensation premiums.
Follow these steps to calculate payroll deductions:
Although you can follow these steps to calculate payroll deductions manually, the process can be tedious and time-consuming, especially for companies with many employees. That’s why we recommend choosing a payroll service to do it for you. We’ve done extensive research to find the best companies and software for the job, and you can see our picks for the best payroll services.