Question

Describe in your own words the different types of withholdings that you will withhold from an employees gross pay when doing payroll. Additionally, describe the types of payments that an employer may make regarding payroll for employees.

Answer 1

Withholding is the amount of taxes that are taken out of your paycheck every pay. This amount builds up, basically like a savings account, and when you calculate your taxes at the end of the year, the amount of your withholding is applied to the amount that is due. If you withhold too much, you will get a tax refund. If you didn't withhold enough, then you will owe additional taxes.

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.

Other withholdings

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 hey 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.

     Federal Income Tax

The employee decides how much of each paycheck is taken out on their W-4 form for their federal income taxes. If they choose to withhold a lot, they could end up receiving a refund on their year-end taxes. However, if they should choose to pay too little, they will receive larger paychecks, but will end up paying the rest owed at the end of the year.

State Income Tax

Your state taxes are like the federal income tax. This tax pays your state’s government and the amount varies by state. The amount each person owes is calculated based on W-4, marital status, taxable income, and number of allowances. Like the federal tax, there is no employer contribution to state tax owed.

Social Security (FICA)

Social Security taxes, also known as FICA (Federal Insurance Contributions Act), requires that employees make contributions out of every paycheck. The amount an employee pays is based on their taxable income and pays to retirement and disability funds as well as family and survivors’ benefits.

Medicare Tax (FICA)

Like the Social Security tax, Medicare sometimes appears as FICA on paychecks. Employers are responsible for paying both FICA taxes to the federal government.

Medicare tax helps pay for hospital care, nursing care, and doctor’s fees for people 65 years and older as well as for people who receive Social Security disability benefits