Payroll deduction what is

Our frequently asked questions can help you avoid compliance violations. Incorrect payroll deductions are often the result of employers charging their employees for benefits and services that they should be paying themselves.

This includes:. There may be additional restrictions at the state level on withholding income to cover uniforms, cash register shortages and job-related expenses. Many Americans who have health insurance purchase it through their employers via payroll deductions. This offers considerable cost savings because the premiums can be withheld from their wages on a pre-tax basis under a Section plan. In actuality, however, employees are not paying for their health coverage directly, but are reimbursing their employer, who submits payment to the health insurance provider.

When reporting employee tax withholdings and filing the required employer tax payments to the federal government, you typically use the following forms:. These documents can be submitted via paper or e-file. Payroll deductions fall into four different categories — pretax, post-tax, voluntary and mandatory — with some overlap in between.

For instance, health insurance is a voluntary deduction and often offered on a pretax basis. Specific examples of each type of payroll deduction include:. The long-term disability LTD deduction covers a percentage of wages for employees who are injured or too sick to work for an extended period of time. When LTD is deducted pre-tax, employees pay slightly less for premiums, but are charged federal income tax on any benefits received.

Short-term disability STD is often taxed in the same manner. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. FAQ What are payroll deductions? These withholdings constitute the difference between gross pay and net pay and may include: Income tax Social security tax k contributions Wage garnishments 1 Child support payments Some payroll deductions are voluntary and may be taken out of a paycheck on a pretax or post-tax basis as long as the employee provided written authorization.

How do payroll deductions work? Statutory deductions Statutory deductions are mandated by government agencies to pay for public programs and services. Voluntary payroll deductions are not required by law, but are based on the fringe benefits your business offers and if your employees opt into these withholdings.

Not all employees will decide to utilize the different voluntary payroll deductions that your business offers, making it important to properly organize and manage your payroll process. With after-tax benefits some k plans, disability insurance, life insurance , you deduct the appropriate amount after withholding government payroll taxes. Health insurance premiums and FSA accounts: Depending on the business health insurance options you offer medical, dental, vision and the specific plan your employee chooses, they may elect to have funds deducted from their paycheck to contribute to their health insurance or FSA account.

Retirement plans: If your business provides retirement plans, like k s or IRAs, an employee can choose to have money withheld and deposited into their specific retirement fund. Life insurance: Although many businesses offer standard life insurance that they pay for, an employee may decide to increase their coverage, in which case, you would deduct the appropriate amount from their pay. Disability insurance: Similar to life insurance, some companies cover a standard disability insurance policy.

Commuter benefits: For employees who commute to work, you might offer a plan that allows them to deduct their commuting costs directly from their paycheck. Stock plans: If you give your employees the ability to purchase stock in your business, you can withhold the corresponding deduction from their pay. Job-related expenses: Job-related expenses may include union dues, meals or uniforms — and employees may elect to have these costs deducted directly from their paycheck. Tuition or professional certification: If you have a program for your employees to take classes or receive professional certifications, they may also choose to have the respective costs taken from their pay.

Understanding and implementing the appropriate payroll deductions for your employees can be a complex process. However, there are certain actions you can take and tips to keep in mind that can help your business manage payroll compliance. Using payroll software or working with a payroll service is perhaps the most influential action you can take to streamline your payroll deductions and ensure your processes are in compliance with government law.

When it comes to mandatory deductions like federal income and state taxes, the necessary calculations are complicated, requiring several different considerations and varying based on the individual employee. Payroll software is also beneficial in that it can generate employee pay stubs, allowing employees to see their breakdown of pay and payroll deductions, without you needing to create these documents yourself.

Moreover, many payroll software systems include payroll tax capabilities, helping you calculate and pay the payroll taxes that your business is responsible for. The next payroll tip is to optimize your onboarding process.

Payroll software may offer another benefit here, as some systems provide an employee portal that allows your employees to input their tax and benefits information directly into the platform. When it comes to payroll deductions, organization is key. Payroll deductions vary based on a number of factors — mandatory vs.

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Your Practice. Popular Courses. Small Business Small Business Taxes. Table of Contents Expand. What Is a Payroll Deduction Plan? How a Payroll Deduction Plan Works. Pre-Tax Deductions. How to Calculate Payroll Deductions. Special Considerations. Payroll Deduction FAQs. The Bottom Line. Key Takeaways A payroll deduction plan subtracts money from an employee's paycheck to pay for taxes or certain services. Internal Revenue Service.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Payroll deductions occur when your employer withholds from your paycheck for involuntary or voluntary reasons, including taxes and benefits programs. Many employers offer flexible savings accounts for medical costs, dependent care expenses, and the cost of commuting.

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