Understanding payroll deductions is a critical aspect of small business ownership. These deductions, which are taken out of an employee’s gross pay, include taxes, insurance premiums, and contributions to retirement plans. Managing these correctly not only ensures compliance with regulations but also contributes to employee satisfaction. Let’s delve into the different types of payroll deductions that small business owners should be familiar with.

1. Payroll Taxes

Payroll taxes are mandatory and include federal, state, and local taxes.

Federal Taxes

Federal income tax is calculated based on the IRS tax brackets, which are progressive. The more an employee earns, the higher the tax rate. The amount to withhold can be determined using the information provided by the employee on their W-4 form¹.

State and Local Taxes

State tax rates vary and some states, like Florida and Texas, have no state income tax at all. Local taxes are levied by counties or cities and are usually a flat rate². Check your state and local government websites for specific information.

FICA Taxes

FICA taxes include Social Security and Medicare taxes. As of 2023, employers withhold 6.2% for Social Security and 1.45% for Medicare from the first $147,000 of an employee’s earnings³. Employers must match these amounts.

2. Employee Benefits

Employee benefits include health insurance, retirement contributions, and other perks.

Health Insurance

If you offer health insurance, premiums are typically deducted from the employee’s paycheck. The amount varies based on the plan and coverage level.

Retirement Contributions

If your company offers a 401(k) or similar plan, employees may elect to have a portion of their salary deferred to the plan. Employers can also match a percentage of these contributions⁴.

3. Other Deductions

Other deductions might include wage garnishments, union dues, or charitable contributions.

4. Vacation and Sick Leave

Paid time off is not deducted from an employee’s salary. Instead, it’s a benefit that accrues over time based on a formula you establish (e.g., hours worked or length of service).

The Consequences of Inaccurate Payroll Deductions

Failing to properly manage payroll deductions can lead to penalties from the IRS, lawsuits, and damaged employee relations. Therefore, it’s crucial to stay informed about current tax laws and regulations.

Resources for Managing Payroll Deductions

If managing payroll deductions feels overwhelming, consider using resources like payroll software or better still, hiring a payroll service provider like APlus. These tools can help ensure accuracy and compliance with tax laws. Understanding and correctly implementing payroll deductions is vital for small businesses. It protects your business from legal complications and ensures your employees receive their rightful benefits.