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Your Payroll Deductions Explained
When was the last time you went through your pay stubs? Many workers consider them insignificant pieces of paper or on-screen documents.
However, they have important information regarding where your money is going. Pay stub deductions are not just about the money. It's information that you need to have better control over your finances.
This article will explain what pay stub deductions are. You'll learn about tax withholdings and other deductions. We'll also discuss tips to make sure that the deductions made are correct.
What Are Pay Stub Deductions?
Pay stub deductions are the amounts normally subtracted from your gross earnings. Your employer does this. Their most important uses include the payment of taxes. Insurance cost payment and planning towards retirement are other popular uses.
A normal pay stub displays your gross pay, which is the total pay for the pay period. It also shows your net pay, which is the disposable pay after deductions. The difference between these figures is your total deductions. This can sometimes be significant.
These deductions are very useful in explaining one’s earnings. It also brings about much-needed order for your earnings. Tracking them enables you to realize the direction you're taking with your money.
Statutory Deductions
Some deductions are prescribed by law. Let's take a look at the typical compulsory withholdings:
Federal Income Tax
Withholding tax is based on information provided on the W-4 form. Every employee fills this. The amount depends on the status submitted. These include the marital status they prefer, whether single or married, and whether they are filing jointly. It also factors in the number of dependents and their income.
In July 2019, the United States adopted a progressive structure. Each tax rate applies to income brackets ranging from 10% up to 37%. This indicates that the more taxable income, the higher the tax rates.
State and Local Income Taxes
You may work and reside in a state that has an income tax. If so, you will find state taxes withheld on your stub. There are significant differences depending on each state. Some states apply classification by districts. Other states have established different rates. This is in conformity with the federal structure of the income tax brackets. Nine states do not collect state income tax.
Certain localities also have local income taxes. They refer to them as city or county taxes. Most of these are deducted by your employer. Then, the amount is forwarded to the proper tax authorities.
FICA Taxes: Social Security and Medicare
FICA is concerned about the withholding of Social Security and Medicare. Social Security is a joint contribution. Both you and your employer will have to contribute 2% of your gross salary. There is a limit that is fixed each year, so this may vary.
For Medicare, the employee and employer each pay 1.45% of the wages. Anyone who is a high-income earner has to pay an additional 0.9% of Medicare tax.
Wage Garnishments
Garnishments include overdue child support, alimony, taxes, defaulted loans, or other legal penalties. This might also be collected by the employer. They deduct a certain portion of the pay to meet the balance.
Garnishments are listed on pay stubs as other deductions after tax. However, there's a limit on the amount of your earnings that can be deducted.
Pre-Tax vs. Post-Tax Deductions: What's the Difference?
Here are the differences between pre-tax and post-tax deductions to lessen tax burden:
Pre-Tax Deductions
This refers to money subtracted from the gross payment before calculating taxes. They cut your taxable income. Thus, they will cut your federal income tax bill. These deductions also cut down your employer's cost of FUTA and state unemployment insurance.
Common pre-tax deductions include:
Employer-sponsored health care plan
This is a contribution made towards the insurance plans. They are deductible before tax under Section 125 of the Internal Revenue Code.
Traditional 401(k) plans
An individual’s contribution is made before the federal or most state income tax. The contribution is liable to FICA taxes.
Group-Term Life Insurance
This is an employer-provided benefit. So, the premiums paid for group-term life insurance can be excluded from taxation. That's for federal income tax, FUTA, and FICA. However, tax benefits are applicable only up to the extent of $50,000 for coverage.
Disability Insurance
This deduction can be made through pre-tax deductions. This reduces the pay since benefits that are gotten in the future may be taxed.
Post-Tax Deductions
Post-tax deductions are those that are made from the check after all the statutory deductions. They affect your take-home pay as opposed to your gross pay. So, they do not have any impact on the taxes that you pay. Common post-tax deductions include:
Roth retirement plan
Contributions to Roth 401(k) or Roth IRA accounts are examples. These are comprised of personal savings, which is money that has already been taxed. You may not receive an allowance for tax credit today. However, the withdrawals, when you are at your retirement age, are tax-free.
Disability Insurance
These are paid from the post-tax contributions. Benefits received in the later years would be tax-free.
Charity Donations
Employees can donate to charity through the workplace. This is usually funded through post-tax deductions.
Common Voluntary Deductions
There are other optional pay stub deductions. Some are provided by your employer:
Health and Dental Insurance
Some common benefits include health care, dental, and vision insurance coverage. Usually, you are expected to contribute a fraction of what is considered your premium. The employer, too, pays part of the premium. These are normally given before tax, reducing your taxable income.
Retirement Plans
There are different kinds of retirement programs available to employees. They may be funded either pre-tax (traditional) or post-tax (Roth). It depends on the particular plan selected.
Life and Disability Insurance
Employers also give basic term life insurance for free. Generally, this is for a sum of up to $50,000. Extra for dependents is covered with post-tax deductions from your salary.
Disability insurance is a bit different. Part of the policyholder’s income is paid out if they can’t work due to sickness or an accident. It can either be pre-tax or post-tax. The tax consequences would determine the fate of the benefits later. They may or may not be subjected to taxation.
Incorrect Deductions To Look Out For
Occasionally, deductions on the pay stub may be incorrect. Here are some signs that you should be wary of:
Unauthorized Deductions
No employer has the right to solely deduct any amount from your wage. It needs to be deductions in line with the law or chosen by you. You must always look to explain any deductions you did not anticipate.
Incorrect Tax Withholdings
If you pay too much or too little in taxes, you may need to revise your W-4 form. Avoid finding yourself in such a situation. The best approach is using the IRS tax withholding estimator.
Deductions That Reduce Pay Below Minimum Wage
Generally, any deductions should not decrease your per-hour remuneration too much. If it takes your pay below the authorized minimum, that's prohibited.
Wrap Up
Pay stub deductions are an important part of compensation. Many working individuals often fail to understand it. This makes it difficult for them to know whether they are being paid correctly. Take time to go through each pay stub. Keep records of earnings and pay stub deductions. This can help you notice mistakes early and plan appropriately for the future.
Your pay stub deductions are key to managing your finances effectively. If you need to generate clear and accurate pay stubs, Paystub Creator offers a seamless solution. Easily create professional pay stubs that detail your earnings and deductions. Let's help you stay informed and in control.
