Payroll Calculation

Calculating Payroll Deductions is Getting a Little Easier

Some employees think payroll calculation deductions are a burden. In fact, someone once said that people who complain about deductions can be divided into two classes: men and women. Payroll deductions are a fact of life. The law requires federal tax, Social Security tax, and state tax where applicable, be withheld from the gross pay of every employee, and most people understand why the withholding process is necessary.

Payroll deductions are not always voluntary, but certain deductions are and that’s why computer software has been developed to make the payroll calculation process a little easier. Sophisticated software can make any small business owner’s payroll deduction task a mistake-proof simple process whether it's done weekly, bi-weekly, or monthly.

Some Business Owners Still Calculate Mandatory Payroll Deductions the Old Fashion Way

There are a few basic facts that every business owner should be familiar with before the payroll deduction process begins. Federal withholding tax is calculated using the information on each employees W4 form. The W4 lists the total number of exemptions and the filing status of each employee. The number of exemptions and the filing status are used with tax charts to determine the amount of the payroll deduction.

Some employees may want to withhold more money for some reason and that information is also listed on the W4. The additional amount can be deducted by following the tax chart. State withholding tax works the same way.

Social Security and Medicare tax (FICA) is calculated at a straight 7.65% of the gross income. Social Security gets 6.2% of that amount and Medicare gets 1.45%. Once an employee reaches $102,000 in gross income the Social Security deduction stops, but the Medicare deduction continues regardless of the amount earned.

Other Payroll Calculations are Voluntary and are Deducted on an Individual Basis

Deductions for stock purchase plans, retirement accounts, and health insurance are based on the instructions given by each employee. Some companies offer employees more savings opportunities, and all of those deductions are added to the mandatory deductions and then subtracted from the gross earnings. The difference is the net pay or the actual amount of the pay check in each pay period.

Payroll checks have a payroll stub that lists the deductions line by line so employees can track how much tax is being withheld each pay period as well as how much insurance and other voluntary payroll deductions cost each year.