A young employee’s very first paycheck can come as a shock. After all, they were hired for a specific hourly wage or monthly salary. Then their paycheck arrives, and it’s much less than expected. That’s because of employer withholding — their employer is legally required to withhold a number of different taxes and other payments from their gross pay.
All employees are subject to standard withholdings, sometimes referred to as payroll taxes, including all full-time and part-time employees. Employers must collect these required taxes and remit the funds to specific tax agencies (including the Internal Revenue Service and the appropriate state agency). Businesses that fail to withhold and remit the required tax funds may be subject to fines, payroll tax penalties and more serious charges.
What are payroll deductions going to look like for your company? Standard payroll deductions include the following, and will be listed separately on an employee’s pay stub.
- Federal income taxes (as outlined in the IRS Code Publication 15)
- State income tax
- Social Security tax (6.2% of the employee’s salary, which is matched by the employer)
- Medicare (1.45% of the employee’s salary, which is matched by the employer)
- If the employee has earned over $200,000, they are subject to additional Medicare tax
- Any local taxes, such as school district, city local income tax, or county taxes.
Employees may ask their employer to voluntarily withhold additional money from their paychecks. The employee must authorize this action and, in many cases, may also withdraw that authorization at any time. These voluntary withholdings include:
- Premiums for any type of health insurance, including medical, dental, and vision
- Premiums for any life insurance policy
- Stock purchase plans
- Contributions to a retirement plan
- Union dues
- Any job-related expense that the employee is required to pay
- Additional withholdings for federal or state income taxes
These deductions may be considered pre-tax deductions or post-tax deductions. For those that are pre-tax deductions, the amount is subtracted from the employee’s overall wage before income taxes, social security, and Medicare are calculated. After-tax deductions will still be taxed as if the employee received that amount as income.
Determining an employee’s withholding
Every new employee is required to complete and submit Form W-4 to their employer. This form requests specific information from the employee, such as the number of dependents the employee is claiming and any additional taxes they wish their employer to withhold. Current employees may submit a new W-4 at any time during the year, although they may only submit one W-4 during each pay period.
Employees who do not have a W-4 on file are given the standard withholding —they are treated as if they are single with no dependents.
Reporting employer withholding
Employers are required to file a number of different employment tax forms every year. On the quarterly Form 941, employers must report the amounts of federal income tax withholding, Medicare and Social Security that they paid for the quarter. In some cases, employers may need to complete the Annual Return of Withheld Federal Income Tax (Form 945) to report any nonpayroll withholding. Employers must complete income tax withholding forms for their state and send in any taxes that are due.