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Payroll Tax Deductions

Payroll tax deductions are a part of the way income taxes are collected in the U.S.. When you work at a job, a part of your income is taken each pay period, based on a number of factors including your total pay, how often you get checks and how many allowances you take when you fill out your W-4 at the beginning of your time at the job. Payroll taxes can be complicated, but there are people who specialize in them and other financial issues. To get this help, consider finding a financial advisor with SmartAsset’s free matching tool.

Payroll Tax Deductions Definition

Payroll tax deductions are an important part of compliance with IRS rules concerning federal income taxes. You can think of them as income tax deductions that happen every pay period, rather than when it’s time to file your taxes.

The more frequently you get paid, the smaller the deductions from each paycheck. But the length of the pay period isn’t the only factor that determines the amount of the deduction. An employee’s marital status, pay rate and allowances claimed will also determine the appropriate payroll tax deductions.

When an employee starts a new job (or has a change in family status) and fills out a W-4 form, he or she selects a certain number of allowances. If you claim zero allowances, your employer will withhold the maximum amount from your paychecks as payroll tax deductions. This makes it more likely that you’ll get a fat tax refund, but you’re essentially giving the government a loan. Instead of getting one big annual refund check, you could be investing that money throughout the year.

Single people who have one job and not much extra investment income can claim one allowance. That strikes a balance between having enough withheld and still getting a refund. Married people and those with children may choose to claim additional allowances.

If you’re getting a giant refund or you’re finding yourself with a giant tax liability, you may want to adjust your allowances. You may be getting too many – or too few – payroll tax deductions.

When it comes time for an employer to calculate an employee’s paycheck, it’s important to understand that there are two kinds of payroll tax deductions: statutory and voluntary.

One note: in 2020, there was a temporary payroll tax “holiday” as a result of the COVID-19 pandemic. This let employers — not individual taxpayers — choose to not withhold these taxes for several months towards the end of the year. These will eventually be paid in 2021.

Statutory Payroll Tax Deductions

Payroll Tax Deductions

Statutory payroll tax deductions include the FICA (Federal Insurance Contributions Act) taxes. The FICA taxes consist of two separate taxes for Social Security and Medicare. Employees and employers both contribute to these federal payroll tax deductions, with each ponying up 6.2% for Social Security taxes and 1.45% for Medicare taxes.

Although you may feel a pang to see that money taken out of each paycheck, those deductions are the way workers pay into the Social Security and Medicare systems that eventually turn into Social Security benefits and Medicare coverage.

The biggest statutory payroll tax deduction is for the federal income taxes themselves. These are calculated according to each year’s payroll tax deductions chart. If you’re an employer who doesn’t have a computer system, payroll accountant or HR firm to do these calculations for you, you can seek out a payroll tax deductions online calculator or consult IRS guidelines.

Deductions can vary from year to year and are based on an employee’s salary and tax filing status (i.e. married vs. single). Employers may also deduct state and local taxes from employees’ earnings each pay period depending on whether the state, city or county require it. It’s the employer’s duty to collect the income tax that’s withheld, Social Security and Medicare taxes and send them to the IRS.

Voluntary Payroll Tax Deductions

The second form of payroll income tax deductions are voluntary. They include things like 401(k) contributions, health insurance premiums for employer-sponsored health insurance, pre-tax commuter benefits and more.

There are both pre- and post-tax payroll tax deductions. For example, you may choose to make pre-tax contributions to a 401(k), but post-tax contributions to a Roth IRA. If those contributions all come out of your paycheck before it hits your bank account, they’re payroll tax deductions.

If you got a big tax bill in the previous year and you think the same might happen again, you can request additional withholding on your W-4 form. The IRS will take more out of each paycheck, but at least you won’t get a huge bill during tax time.

Bottom Line

Payroll Tax Deductions

As an employee, it’s important to consider the impact of taxes and not just the gross salary when you decide whether or not to take a job. Your paycheck may look considerably smaller by the time both statutory and voluntary payroll tax deductions come out. As an employer, you have have more options than ever when it comes to getting help with payroll tax deductions. A range of websites, calculators, programs and HR startups can help companies with payroll tax compliance.

Whether you’re an employer who wants to verify that your payroll system is as good as it can be or an employee who wants to figure out the optimal number of allowances to claim, it’s a good idea to double-check your calculations and monitor earnings statements to make sure all deductions are correct.

Tips for Dealing with Payroll Taxes

  • Taxes are difficult to deal with for many people, to the point where finding someone to help you might be the best decision you can make. If you are an upper-middle-class income earner, a financial advisor can help you make the most of your funds. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • You can use SmartAsset’s free paycheck calculator to see exactly what your take home pay will be after payroll taxes and all other deductions are taken.

Photo credit: ©iStock.com/TheaDesign, ©iStock.com/kiddy0265, ©iStock.com/RapidEye

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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