As an employer, you pay your employees and you must withhold the correct taxes. You’re accountable for explaining that process to your employees. Automated payment systems, like Payroll by Fingercheck, make it easier to calculate taxes, as does our handy payroll tax calculator. We can set you up in a few minutes. And here’s a quick guide to help you explain withholdings and deductions to your employees.
In your onboarding process, the first payroll document that your employees must complete is the IRS Form W-4 (Employee’s Withholding Certificate). The W-4 helps them determine how much federal tax withholding will be applied to their paychecks.
Key points for helping employees with Form W-4:
- Explain that federal income tax rates are progressive and vary by wage and filing status. As an employee’s taxable income increases, their tax rate also increases.
- An employee’s federal income tax liability can be reduced by deductions and credits.
- The IRS issued a redesigned W-4 in 2020. Make sure you download the redesigned form.
- The new form has different steps and calculations based on how an employee files taxes. The options include filing as single, married filing jointly, married filing separately or head of household.
- There are different steps for employees who have multiple jobs and/or spouses who work.
- And there are calculations for dependents when employees want to withhold more money due to earning additional income or to withhold less money due to exemption status.
After your new employee completes the W-4, you fill out the company information including your Employer Identification Number (EIN). Then you or your accountant enter the data into your payroll system. The IRS requires employers to keep a copy of every employee’s W-4 for four years. Onboarding by Fingercheck can help with this, too.
The typical paycheck is divided into five sections: pay period, gross pay, deductions, taxes, and the summary. Each section provides details specific to your workers’ salaries.
The pay period is at the top of the stub for easy reference. Depending on how often your employee is paid (weekly, bimonthly, twice weekly or monthly), the exact dates of the period are printed at the top.
The paycheck stub indicates the current gross amount being paid in this check and the amount the employee has been paid year-to-date (YTD). In the case of hourly workers, the number of hours and rate of pay are shown. Gross earnings are the amount earned before any employee paycheck withholdings or deductions are taken out. Net earnings are after deductions have been taken.
Deductions are made before taxes are calculated. Sometimes, employees are confused about the difference between deductions and withholdings. Deductions are taken pre-tax for benefits and/or donations, like United Way campaigns. Examples of deductions include health insurance, flex spending and 401(k) or retirement contributions. Employee paycheck withholdings are the required taxes each time an employee is paid.
Employees may or may not have employee paycheck deductions listed in this section. Our trusted tax partner CorpNet has detailed information about payroll deductions such as health insurance, retirement account contributions, child support payments and any wage garnishments required by the IRS will be listed in this section.
Don’t forget: Withholdings can be revised
Employees can change their withholdings by completing another W-4. You might want to encourage them to review their forms process with their accountants. Some deductions can also be changed; for example, the employee may change health insurance plans during open enrollment.
The tax section shows how much money was withheld for federal and state taxes. The paystub shows two amounts: the current paycheck and YTD.
- Federal Taxes
- The W-4 form helps employees determine how much federal tax withholding will be applied to their paychecks.
- Federal taxable income can be reduced by tax deductions and tax credits, which provide benefits to specific types of taxpayers.
- FICA (Federal Insurance Contributions Act)
- All U.S. taxpayers must contribute taxes to Social Security and Medicare. Some paychecks show FICA as one total amount; others break it down by program.
- Social Security
- All employees and employers pay a percentage of their gross wages to fund Social Security.
- When you retire, you start getting a monthly check from the federal government. The amount is based on how much money you made while you were working.
- Many people mistakenly think the “full retirement age” (the age you can start collecting the full payment amount from the Social Security taxes you’ve paid into the system) is 65. It’s not — if you were born in 1960 or later, the full retirement age is 67.
- The Social Security tax is 6.2% of gross income. Both employer and employee contribute that percentage.
- However, there is a maximum taxable wage every year. This year, your contributions end when you’ve earned more than $160,200.
- Medicare is a federal health insurance program for people 65 or older and certain younger people who have disabilities.
- The primary purpose of Medicare is to cover most hospital and medical (doctor’s appointments, etc.) expenses.
- The Medicare tax is 1.45% of gross income. Employers and employees contribute to Medicare, and there is no income cap for the Medicare tax.
- State and Local Taxes
- Depending on where your employee works (not where the business is located), you also may be required to withhold state and local taxes.
- Some states have no state income tax but may collect municipality or transportation taxes, for example.
- Our tax partner CorpNet can help employers register to submit payroll taxes in each state where employees conduct business. Typically, registration is completed through the state’s department of revenue.
The paycheck summary shows the current and YTD amounts in wages, taxes, deductions and net pay. The net income is the amount your employee receives after employee paycheck withholdings and deductions.
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