Understanding Mandatory & Voluntary Payroll Deductions

Understanding Mandatory & Voluntary Payroll Deductions

Payroll deductions are costs which are applied to the checks of employees every pay period. This means that the employee’s gross pay will always differ from the net pay, due to these deductions. Some deductions are mandatory while others are voluntary. While some deductions are levied by the state, others are federal. Below is a list of them.

How Do Payroll Taxes Work?

Payroll taxes are used to pay for various public services. For instance, Social Security tax is used for people who are retired or disabled. Taxes for Medicare are used for the Hospital Insurance Trust Fund. Federal income taxes are placed in the General Fund of the U.S. treasury where the money is then distributed to various government agencies. State income taxes are used for programs within each state, like education, prisons and public assistance programs.

FUTA tax is unique in that it is not withheld from the wages of employees. Instead, employees pay it after which the funds are put into three federally owned accounts. These accounts are designed for things such as unemployment insurance in the state, extended benefits and certain types of loans. SUTA taxes are similar to FUTA and will not be withheld from the wages of employees and are designed for workers who have been displaced.

Payroll Deductions Which Are Voluntary

  • Retirement plans – This includes things such as the 401K or IRA. Employees who have these plans can opt to have a certain amount taken out of each paycheck so the money can be set aside for retirement.
  • Job expenses – This can include payment for things such as meals, union fees or uniforms.
  • Life Insurance – Similar to retirement, employees can arrange to have a specific amount taken out of their checks that can be set aside and used in the event of their death, when the funds would be made available to beneficiaries.
  • Premiums for health insurance – The deductions for health insurance will differ based on what is offered by employers and the plan their employee selects. Health insurance will usually cover both prescriptions and doctor appointments.

Payroll Deductions Which Are Mandatory

  • Garnishment – Employees that have unpaid debts may be subject to garnishment, in which a court order will be sent to their employer instructing them to have a certain percentage removed from their paycheck.
  • FICA Tax – This is a federal tax which is comprised of both Medicare and Social Security. Employers and their employees will make equal contributions, which should be reported using Form 944 or 941. This tax is electronically remitted by using the Electronic Federal Tax Payment System.
  • Local and state taxes – Every state has a distinct structure for income taxes. To determine how much employers must withhold from the paychecks of their employees, you will need to check the local requirements.
  • Federal Income tax – This tax is computed based on the amount of allowances claimed by employers on the Form W-4, along with gross pay. The withholding tables provided by the IRS in Publication 15 can help employers determine the amounts which should be withheld from each employee’s paycheck.