As an employer, you’re responsible for withholding your employees’ earnings to cover taxes and other expenses like retirement accounts and insurance policies. Most of the time, you only need to take money out of each paycheck once, but there are certain deductions that occur more frequently. Be sure you know the ins and outs of payroll deductions so that you can be sure to cover your company’s bases while keeping your employees happy.
1) Federal Taxes
If you’re working with a small business, you probably don’t have to worry about federal taxes. That said, if your employer takes out more than $200 in federal taxes every month, they need your Social Security number for tax withholding. Federal taxes are taken out of each paycheck through payroll deductions or by filling out Form W-4 and handing it over to your boss. You’ll need to fill out a new form each year as well as whenever there’s a change in marital status. If you’re self-employed, use Schedule C on IRS Form 1040 to calculate how much income tax is due at different levels of profits.
2) State Taxes
If you live in a state with an income tax, you can use paycheck deductions for state taxes. To have your employer set up automatic deductions, sign up for Electronic Funds Transfer (EFT) through your bank or credit union. You can also choose direct deposit, which is a direct transfer from your checking account to your government agency. Keep in mind that if you are paid twice per month, you will have two separate EFT payments each month—one for withholding and one for pension or other retirement benefits. Some employers require that employees change their direct deposit elections every time they get a new job.
3) Local Taxes
As a business owner, it’s your job to make sure you pay all your employees correctly. This means keeping track of every local tax you owe, from Social Security and Medicare taxes to unemployment insurance fees. It’s also important that you know when and how much each employee will owe in taxes so that you can withhold accordingly. For example, an employee who’s single and doesn’t have any dependents may not need as much money withheld from his paycheck for Social Security and Medicare taxes as someone who is married with two children—both her own and her spouse’s Social Security taxes should be factored into her paycheck deductions.
4) Social Security
As both an employer and an employee, you are subject to certain rules when it comes to Social Security tax. If you are self-employed, meaning that you are not classified as an employee by your company but instead run your own business, then there are some rules in place for you. These rules may seem difficult at first glance, but they’re actually pretty simple if you’re willing to go through them step by step. The main point is that if you net more than $400 in profit in a single year then you will need to pay Social Security tax.
5) Retirement Plans
The employee portion of health insurance premiums can be a large deduction from your paycheck. Under certain circumstances, it may also be eligible for tax-free reimbursement from your employer. It’s a big topic with lots of rules and regulations, so be sure to talk to your employer about their policy before going through with an arrangement. For instance, there are caps on what your employer can deduct from each paycheck. They may also have a policy where they pay an additional amount per month so you don’t have to pay as much out-of-pocket during each visit or procedure. You should learn as much as possible about these rules if you choose to set up a reimbursement agreement for health insurance costs.
6) Health Insurance Costs
Knowing that you’re paying for health insurance may not be enough. For example, you could be taking part in a group insurance plan that requires you to pay copays, deductibles and other expenses before your medical bills are paid. Health insurance coverage can vary greatly based on your needs, so make sure you understand your policy well before committing yourself to it. Check with your employer for more information about whether or not health insurance premiums are taken out of your paycheck or if additional fees apply.
7) Other Benefits (Life Insurance, Mortgage Insurance, etc.)
Most people don’t think about life insurance when they talk about payroll deductions, but your company will deduct it from your paycheck. In most cases, you can opt-out and pay for it on your own. When making a decision, look at how much you actually use your employer’s plan and whether it’s something you want to cover through work or independently. You also need to understand what kind of life insurance your employer offers and how it fits into your overall financial picture—do you need supplemental coverage? Or would a term policy be sufficient? Finally, consider other kinds of benefits that get deducted from paychecks: Some employers automatically enroll their employees in health insurance plans or retirement savings accounts such as 401(k)s.
For all of the above deductions and tasks, good payroll software can be your best bet. Payroll software isn’t just for calculating tax-related deductions—it also allows you to handle non-tax deductions, like health insurance premiums, 401k contributions, and more. This way you don’t have to worry about making sure all your payroll paperwork is filed on time. A good payroll system streamlines operations so you can focus on running your business—and not just handling paperwork.