Payroll Deduction Facts That Will Keep Your Employees Calm
Payroll deduction is necessary to keep the company afloat. Employers are required by the government to subtract certain amounts from each employee’s paycheck. Most times, the deductions include personal income tax and social security, which the IRS receives from the company in advance. The company is like a collection agency for the IRS. If you have a CPA that does your tax management and files your return, you can discuss these deductions to see if they are plausible or necessary.
The knowledge of payroll and the deductions is something that affects both the remuneration perceived as the employer who pays the wages. One of the most common confusions is to confuse the gross salary with the net salary. This is because it is of great importance that the worker and the employer have both concepts clear, in order to avoid misunderstandings when agreeing to the remuneration received by the worker.
Taking into account that all the concepts that make up the gross salary are part of the remuneration, the most correct thing for payroll or HIR managers and those responsible for personnel administration is to agree on gross salaries, since the net salary may vary depending on what was declared by the worker on Form W4 (Employee’s Withholding Allowance Certificate) during the hiring process.
The Sections
It can be said that the payroll is divided into three sections:
Accrued
Deductions
Appropriations
The accrual corresponds to all the concepts for which an employee receives remuneration, such as salary, overtime, commissions, transport assistance, night surcharges, etc. The sum of these values makes up what is called the total accrued, which is the totality of the income that an employee receives as compensation for work completed. Once the total value that a worker has earned in a fortnight, week, or a month has been determined, the items that the employee must pay, either to the company or to third parties, are subtracted.
The Allocation
The amount allocated to Social Security is usually around 6.35% and 6.7% of your base salary. Although it may vary slightly depending on the sector in which you work and your collective agreement, it is usually calculated in this way:
Contribution to Unemployment
It depends on the type of contract you have. If it is a general contract, it will amount to 1.55% of salary accruals. If it is a fixed-term contract, the amount is 1.60%. This contribution is so that you can collect unemployment if you lose your job.
Common Contingencies
They represent 4.7% without counting overtime. This money goes to social benefits for those who need them, except unemployment, work-related accidents and occupational diseases.
Overtime Done at the Request of the Company
2% of the amount that the company has paid you for that work performed out of the ordinary.
Overtime Employees Choose to Do
The deduction is 4.7% of the accrued amount.
The Contributions
There are certain contributions that employees make toward their future health and pension. Here are some of the contributions expected to be withdrawn from the employee’s paycheck or salary; depending on certain variables.
Health Contributions
The worker must be affiliated with the health system for payroll deduction contributions. The health contribution, which corresponds to 12.5% of the contribution base salary, is made in conjunction with the company. The latter contributes 8.5%, and the employee must contribute the remaining 4%. That 4% is the value that must be discounted (deducted) from the total accrued by the employee.
The health contribution is the responsibility of the company, which must pay the respective contribution, both the value that corresponds to it, and the value that corresponds to the employee. That is why this value is deducted from the employee's wages, since the employee cannot collect the entire payroll, and then go the next day to consign what corresponds to him for health, but it is the company that consigns the entire contribution (12.5%).
Pension Contributions
The worker must also be affiliated with the pension system. The pension contribution affects both the company and the employee. Of the total contribution (16%), the company contributes 75% (12%) and the worker contributes the remaining 25% (4%). As the worker must contribute 4% for pension, this value is deducted from the accrued value in the respective period (week, month or fortnight).
The treatment of this payroll deduction is the same as the treatment of the health deduction, that is, the company is the one that makes the total payment including the exact amount that corresponds to the worker.
Credit Installments to Financial Entities
The fees that the employee must pay to a financial institution for the repayment of a loan can also be deducted from the employee's wages. This form of payroll deduction does not happen often, but in some cases, it does.
Debts to the Company
They can also be deducted from the payroll, the value that must be paid for the obligations that the employee has with his company, such as a credit that it has granted, or as compensation for any damage or economic detriment that the employee has caused to the company.
Contributions to Cooperatives
The fees or contributions that employees make to legally constituted cooperatives can also be deducted from the employee's payroll.
Judicial Seizures
Garnishments ordered by the judicial authority against employees must be deducted from the payroll by the company and consigned in the account that the judge has ordered. This could include government educational loans, alimony, and child support.
Union Dues
The fees that unionized workers must contribute to the union to which they are affiliated, and provided that there is an authorization from the employee, they can be deducted or deducted from the employee's payroll.
Payments in Kind
In addition to withholdings and Social Security contributions, many employees can find other types of deductions on their payroll: payments in kind. It is very common for certain companies to provide their employees with medical insurance, restaurant vouchers or transport passes, for example. This is what is called payments in kind and is one of the deductions that can appear on a payroll.
On the other hand, if an employee asks for an advance on his salary, he will see that there is an advance deduction on his payroll. Other deductions that may appear on the payroll are liens from the Tax Agency, which occur when this entity uses the worker's salary to collect a debt.
Ultimately, deductions of one type or another appear on all payrolls, although they are not always given enough attention. It is important to be familiar with these concepts to know how to calculate the net and gross salary that is received accurately and to better plan your income.
The employer cannot deduct or withhold any value from an employee's salary without the express consent of the employee, unless there is a competent court order. And so, you don’t have to be concerned about payroll deduction entities that do not concern your personal situation.
The Taxes
Every person has to pay taxes on their earnings. The taxes due go to the IRS and they are mandatory. If not paid, you can get into serious trouble for evading taxes. Therefore, the employer has to deduct taxes from your paycheck each week, month, or fortnightly. You end up getting back some of the taxes withdrawn at year end’s when you file your income tax return. Some people may owe the IRS, but for the most part, if you use our deductions wisely, you will come away with some form of refund.
For example, if you have dependents you can file for, you would probably get a refund as long as the law allows. There are certain criteria such as the age of the dependent, and whether the dependent lived with you for a whole year. If you pay child care services for such a dependent, you will also get a little extra on your refund. Personal income tax withdrawal will depend on both the annual salary and the family and the personal circumstances of each worker. For the correct calculation, it is mandatory that you complete form W4 upon being hired. This will explain your personal situation such as how many dependents and whether or not you have any exemptions.
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What Appears On The Paycheck
The block of accruals and deductions on the paycheck closes with a final summary where the total amounts are reflected. On the one hand, the total remuneration, the contribution base for Social Security, the base for personal income tax, the total accrued and the total to be deducted will appear. The company cost also usually appears here, which in addition to the total accrued includes the part of the contribution that the company makes for the worker to Social Security. From the result of these calculations, the concept that matters most to most workers will appear, the final amount to be received.
Conclusion
It goes without saying that the concepts presented here regarding payroll deduction are not all that may exist. They are only the most common. In addition, not all of them are mandatory, some employees may apply some and others not. The only ones that are mandatory for all employees are those related to social security and personal income tax especially.
Having an efficient payroll program, which allows making changes and calculations in an agile way, is a great time saving for most organizations, as well as reducing the number of errors in their calculation. It is important to know what is on your pay stub so that you can ratify it when it comes time to file for your taxes with the IRS.