Calculating Payroll Deductions
The calculating of payroll deductions has become a simple task for the payroll department thanks to some very sophisticated payroll software.
Calculating payroll deductions is a function of the payroll department or in the case of the small business; it is often done by the owner or bookkeeper. The process is not a voluntary matter. The law requires that deductions for Federal Tax, State tax where applicable, and FICA taxes been withheld from the paychecks of all employees. These taxes are paid quarterly to the appropriate agencies and a Form W-2 statement of income must be sent to all employees at the end of the tax year.
The Federal withholding is determined by the information that is given by the employee on a Form W-4. This form lists the employees filing status and total number of exemptions. It also allows additional withholding if the employee so desires. The filing status and the number of exemptions are used with tax charts to calculate the exact amount of the payroll deduction. Once the amount is determined, the additional withholding can be added into this figure. State taxes usually work the same way.
The FICA tax is for both social security and Medicare. It is calculated at a straight 7.65% of gross income. This represents 6.2% for social security and 1.45% for Medicare. The social security amount has an upper limit of $102,000 of gross income. Once this figure is reached, the social security withholding ceases although the 1.45% continues in effect regardless of the total gross income.
These are the deductions mandated by law. Deductions for such things as retirement, stock purchase plans, and health insurance premiums are calculated on an individual basis depending on the type of deductions and the instructions or permission of the employee. When all the payroll deductions are totaled, they are subtracted from the gross earnings. The resulting figure is called net earnings and this is the actual amount of the pay check. Usually, the payroll check will have a stub giving year to date totals for all parts of the calculation formula including gross income and total withholdings.
There are a large number of payroll deduction software programs on the market. They are scaled to all types of organizations regardless of size. The payroll programs have the pertinent information already entered and all that is needed is an input of the gross earnings for the payroll period. In the cases of hourly employees, the hourly rate of pay is entered and only the actual hours worked need be entered to generate the payroll check. Most of the software programs are not only capable of calculating payroll checks, but also of printing them, and finally storing the payroll information in the appropriate files for accounting purposes