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How do I ensure accuracy in the area of Payroll deductions?

Home » Small Business » Small Business Payroll » How do I ensure accuracy in the area of Payroll deductions?

Deductions are the confusing part of small business payroll. In a business of only a dozen employees, you may have a dozen different sets of deductions. Deductions generally fall into the categories of taxes and convenience deductions.

Taxes


  • Social Security/Medicare: Social security and Medicare are required deductions from all employees, but these deductions are not made at the same rate for all employees. These deductions primarily pay for employee retirement, disability, survivors’ benefits, and Medicare health insurance.
  • Federal Income Tax: The size of this deduction varies based on an employee’s tax bracket. At the end of the year, an employee files his tax returns to ensure that the company deducted the proper amount of taxes from his wages.
  • State Income Tax: Not all states require a separate income tax, but for those that do, it works on basically the same philosophy as does the federal tax.
  • Unemployment: This is considered a payroll tax, but it is not a deduction on employee paychecks because the employers themselves pay both state and federal unemployment costs.

Convenience Deductions: Convenience deductions are funds that an employer takes out of an employee’s paycheck, generally before deducting taxes. Withdrawing these funds reduces an employee’s gross pay, which in turn reduces the amount of tax due. Legitimate convenience deductions include:

  • Health insurance premiums
  • Charitable donations
  • Medical spending account contributions
  • Uniform costs

On occasion, certain employees may need additional deductions, perhaps for docked pay or wage garnishments, but in any case, payroll processing is a fairly straightforward matter. Determine an employee’s gross pay, or regular rate, by multiplying the hours worked by the hourly wage (for an hourly employee) or by dividing the yearly salary by the number of pay periods (for a salaried employee). Then, take out all necessary deductions and come up with the employee’s net wages—this is the amount that should appear on the employee’s check.

Above all, don’t forget to preserve your records. The IRS requires that you retain records for four years after you file the tax return. This way, even if you make a mistake, you have the evidence to go back and correct it later.



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