Definitions of Mandatory Deductions — Payroll
It is a common sight to see employed workers crying over the greatly reduced paychecks on payday. What are the definitions of mandatory payroll deductions that so reduce our take home pay?
There are all types of deductions that can be taken from your payroll check. They can be lumped into two major groups. These are mandatory and voluntary. The terms are fairly self explanatory. Mandatory deductions are withdrawn because the employer is legally bound to withhold them. Voluntary deductions, on the other hand, are optional. In most cases, the employee must actually authorize the deduction in writing. What are the definitions of the mandatory payroll deductions?
The first mandatory payroll deduction, and often the largest, is the Federal Income Tax withholding. The Government and the Internal Revenue Service does not trust us to show up at a tax office on April 15th and pay whatever income tax we owe. If they did, we would actually have the benefit of retaining and investing our tax dollars during the year. As it is, the Government gets the use of any excess funds and refunds them to us after we file our tax return. The employer is required to fill out a Form W-4 on a new employee. The Form W-4 will be the guide to the employer for the proper filing status and number of exemptions claimed. The employee is given the option of requesting additional withholding as well.
The amount withheld from the employee is sent to the Internal Revenue Service on a quarterly basis and the total of the withholding must be reported to the IRS and to the employee on Form W-2 at the end of the tax year. It is important for tax payers to understand that withholding tax from your payroll in no way changes your tax obligation. What actually happens is that if too much is withheld, you get a refund, and if too little is withheld, you must pay the difference when you file your return.
The other mandatory deduction from payroll is the FICA tax. FICA stands for Federal Insurance Contributions Act. It covers two major taxes. One is for Social Security and the other is for Medicare. The total of the FICA tax is 15.3% of your income, but your employer is obligated to pay one half of this figure. Also, the Social Security portion of this payroll deduction ceases when a certain income figure is reached. The smaller Medicare tax is withheld regardless of earnings.
If a State has a State Income Tax, this will be a mandatory deduction from payroll also. The other mandatory deductions are court ordered deductions such as tax liens, child support payments, and other types of garnishments of wages. These mandatory deductions are always generated by a Court Order that gives your employer no choice but to comply by withholding wages and sending them to the appropriate agency. Although we may moan and complain about mandatory deductions of all types, the payroll department should not be the target of your ire. The common thread in all mandatory deductions is that the employer is compelled to withhold them.