Calculating Payroll Deductions
Calculating payroll deductions is a necessary function of anyone who pays wages to their employees. It is important that this is done accurately and payments and deposits are made timely.
Calculating Payroll Deductions
It is a fact of life that your paycheck does not reflect the gross total that you have earned. There are certain payroll deductions that are not voluntary. In the case of garnishments, a set amount must be deducted usually as a result of court orders. This is never optional; the employer must deduct the proper amount and forward it according to instructions. Other deductions for such benefits as savings plans and health insurance are usually voluntary and the employee authorizes the amount to be deducted.
Then there are taxes. These are also not voluntary. In many cases, the employee is not aware that the employer is being forced to pay additional or matching amounts. These deductions are strictly regulated by law and there is a lot of paperwork involved in the process. Accurate accountings of taxes withheld must be submitted on a regular schedule and often deposits made to payroll tax accounts.
The employee must fill out a Federal Form W-4 when he is first employed. This is his statement of the exemptions that he is entitled to receive. He can receive exemptions for himself, his spouse, and his dependents. The employee may elect to claim fewer deductions than those he is entitled to claim and he can also request additional withholding if he wishes. The main and largest tax deduction is usually for Federal Income Tax. This amount is calculated using Federal tax rates and the number of claimed exemptions. State taxes are also calculated using the information from the W-4 form.
Social Security and Medicare, which are also known as FICA taxes, must also be withheld. The Social Security rate is 6.2% of the employee's wages. The employer must pay a matching amount as well. The 2007 income limit is $97,000. After this figure is reached, no more Social Security taxes need to be withheld. The Medicare tax is 2.9% of the employee's wages. This amount is split between employee and employer so only 1.45% must be deducted on the payroll check. The employer will pay the other 1.45%. There is no limit on this tax. It is collected regardless of how much income is earned.
The FUTA tax is for unemployment benefits. The employer is responsible for calculating and paying this tax. It is not deducted from the employee's wages. The rate is 6.2% also, but in most cases a credit of 5.4% is allowed for the State unemployment wages. This produces an actual rate of 0.8% and it is only due on the first $7000 of income. This results in a maximum FUTA tax of $56.00 per employee per year. The SUTA, or State unemployment tax varies from State to State. In most cases, it is reduced when fewer unemployment claims are generated by the business. There are many different forms of payroll deduction software available to aid the business owner and the payroll department in calculating these deductions and preparing the necessary reports. It is essential that this is done accurately and reports are filed in a timely manner. Severe penalties can be imposed for failure to do this.