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Whether you’re an employer running payroll or a W-2 employee who wants to better understand where your paycheck is going, you should understand what state, federal and benefits-related payroll deductions are coming out of each paycheck. Knowing this information beforehand helps you better plan your personal or business finances and create a budget that accounts for any tax obligations you may have.
You can use our payroll deductions calculator to calculate your employees’ take-home pay accurately. By using this tool, you can gain insight into your financial situation and ensure that your deductions are in line with your expectations.
When using the payroll deductions calculator, it’s essential to familiarize yourself with these terms.
The total income earned from the beginning of the calendar year until the present.
Your tax filing status, such as single, married or head of household, affects your tax withholding.
The frequency at which you receive your pay, such as weekly, biweekly or monthly.
Tax credits provided to taxpayers for each qualifying child under the age of 17.
Tax credits available for dependents who do not qualify for the child tax credit.
Indication if you have multiple jobs or if your spouse is also employed. Both of these affect your tax withholding.
Any additional income not related to your primary job.
Nontax-related deductions, such as union dues or health care premiums.
Your total income before any deductions or taxes are applied.
Contributions to retirement plans that are deducted from your paycheck before taxes.
The portion of health insurance premiums you pay as an employee.
Taxes imposed by your state and local governments. Not every state or jurisdiction imposes taxes on residents’ income and those that do may have varying tax rates. This is important if you live in one state but work in another or if you employ people across multiple states.
Deductions that reduce your taxable income before calculating taxes.
Deductions applied after calculating taxes on your income.
Reimbursements provided to you after tax deductions have been calculated.
A federal payroll tax that funds the Social Security program.
A federal payroll tax that funds the Medicare program.
The amount of federal income tax withheld from your paycheck based on your tax status and other factors.
Payroll deductions are specific amounts of money subtracted from an employee’s gross pay before they receive their net paycheck. These deductions are withheld to pay various taxes, garnishments and benefits.
Withholdings can include income and Social Security taxes, retirement contributions, health insurance coverage and other deductions that vary based on individual circumstances and employer policies.
Pretax deductions are subtracted from employee paychecks before taxes are withheld. Since these are not included in gross pay, pretax deductions reduce the amount of taxable income (and subsequently, the amount of money to be paid to the government). Common pretax deductions employees can opt into include health and life insurance and pretax retirement plans, such as a 401(k).
Post-tax deductions are subtracted from employee paychecks after any necessary taxes have been withheld. Since these reduce net pay instead of gross pay, post-tax deductions do not lessen taxable income or tax burden. Roth individual retirement account retirement plans, union dues and wage garnishments are standard post-tax deductions while employees can opt out of many post-tax deductions, wage garnishments are mandatory.
Gross payroll is the total amount of money earned by an employee before any deductions or taxes are taken out and represents the employee’s total income. Net payroll, colloquially known as take-home pay, is the amount of money an employee receives in their paycheck after all deductions and taxes have been subtracted from their gross pay.
The method for calculating gross payroll varies for salaried vs. hourly employees:
Once you have your gross payroll, you can calculate your net payroll with the following steps:
Payroll software plays a crucial role in managing payroll deductions efficiently. It automates the calculation and deduction of taxes, retirement contributions and other deductions. This ensures compliance with tax laws and regulations while simplifying the payroll process for employers and employees.