When it comes to paycheck distribution, employers are required by law to deduct certain amounts, and a failure to do so can result in costly penalties. As the area’s premier payroll service provider, Wilson, Rea, Beckel & Associates CPA’s LLC in Pagosa Springs, CO, continues to help a variety of businesses stay in compliance. Here are some of the most common payroll deductions and what they mean.
6 Common Payroll Deductions
1. Social Security or FICA
Also known as the Federal Insurance Contributions Act or FICA, Social Security taxes are required deductions. The taxes are used for retirement funding when an employee reaches their official retirement age, and employees pay the tax based on their taxable income.
2. Federal Income Tax
When a person becomes a company employee, there are required to fill out a W-4 form. This document is used to compute federal income taxes. The amount deducted is based on the employee’s income, the number of dependents, marital status, and taxable income. Payroll service specialists advise checking with human resources to ensure the right amount is being deducted from each paycheck.
The Medicare tax deduction is used by the federal government to pay for hospital expenses and other medical costs for people 65 years and older. The tax, which is also listed on a paycheck as FICA, also provides Social Security disability benefits. Payroll service specialists say employers are required to deduct a certain percentage based on an employee’s annual wages.
4. State Income Tax
This common payroll deduction is similar to federal income taxes. The amount is paid to the state’s government to fund schools, road construction, and other projects. Deductions are based on an employee's taxable income, dependents, and marital status indicated on the W-4 form.
5. Employer-Sponsored Medical Plans
If an employee participates in a company’s medical plans, the deductions are indicated on their paychecks. These include company-sponsored, dental, vision, and health care plans. Some employers offer health savings accounts (HSA), which are tax-deductible. The employee contributes an amount each pay period to the HSA, which is listed on their paychecks.
6. Retirement Plans
Companies that offer 401(k) and 403(b) plans deduct employee contributions from their paychecks. The employee selects the amount they want to contribute and how it is invested. Public-sector employers and nonprofits use the 403(b) plan the same way.
These are some of the most common payroll deductions used by most employers. If you own a business, Wilson, Rea, Beckel & Associates CPA’s LLC is your trusted source for professional payroll services. The team specializes in helping firms of all sizes. To learn how the agency can oversee your payroll operations, call (970) 731-1040. For your convenience, services are available in Pagosa Springs and the Four Corners area. Visit their website for more information on the complete lineup of services, and connect with them on Facebook.