Owning your own business can be a rewarding and challenging experience. Building your business and increasing profit means you need a team of qualified employees on your side. But, managing payroll for your employees comes with its own challenges. No matter if you just started your business or need new hires for an existing business, understanding payroll deductions is important. You need to ensure that the right amount of wages are being deducted for each employee. Here is a quick guide to the different types of payroll deductions.
What are Payroll Deductions?
There are two main types of payroll deductions: voluntary and mandatory deductions. Voluntary deductions are typically benefits that you choose to offer to employees, such as insurance or a retirement plan. Your employees must opt-in, and you need to have their written consent before you deduct from their paychecks. On the other hand, mandatory deductions are required by law. These are portions of wages that are withheld from hourly and salaried employee paychecks to meet tax and other required obligations.
Mandatory Payroll Deductions
As stated, mandatory deductions are the deductions required by law to withhold from your employee’s gross pay. These deductions go to taxes and other programs such as:
- Income taxes (federal, state and local)
- Social Security and Medicare
- Wage garnishments
As an employer, you are required to withhold payroll taxes from your employees and submit them to the appropriate tax agencies. If you fail to do so, it can lead to serious penalties for your business.
Voluntary Payroll Deductions
In addition to the mandatory deductions you must take into account, there are also voluntary deductions that your employees can choose to have taken from their paychecks. Voluntary payroll deductions include health, life, disability insurance, 401(k) plans, or flexible spending accounts. Because these types of deductions are voluntary, they require a written authorization from the employee before the deduction. Name, date, the reason for the deduction, a dollar amount, and signature are required from the employee.
Why It’s Important to Understand Payroll Deductions
There are a variety of payroll deductions that you will have to subtract from your employee’s paychecks. As an employer, you must understand the payroll process and are withholding the correct amount of money. Otherwise, it can lead to serious consequences that can impact your business. Taking the time to explain the deductions on your employees’ paystubs can help them feel more empowered and less frustrated with their take-home pay.
Contact Bowman & Company Today
Bowman & Company CPA, PC provides all of our individual and small business customers with experienced, accurate, and affordable financial services. Our financial services aim to decrease your taxes and increase your net worth through responsible, timely, and accurate record keeping. We offer our services to clients throughout the Washington, D.C., metropolitan area, including Maryland and Baltimore County, Columbia, and Howard County. For more information on our offerings, contact us online or call us at (410) 381-8121. You can also find us on Twitter, Linkedin, Facebook, and Youtube.