Employee Payroll Deductions
Calculating Payroll
Payroll Deductions
What the Employer "Giveth", The Government Taketh Away !
Finally, we're now done calculating our employee's gross pay (earnings), but we still have to calculate the deductions taken out from their pay. I guess there really is "no rest for the weary."
Payroll Worksheet
For Calculating Employee Income Tax Withholding Amounts
| Employee | Pay Period | Employee Status | Number Jobs | W-4 Box 2 (c) Checked | Number Dep Amount | Gross Pay | Pre Tax Ded | Adjusted Gross | Inc Tax Withheld |
| Fat Chef | B-Wkly | Married | 2 | Yes | 1 2,000 | 1,567.32 | 100.00 | 1467.32 | 34.00 |
| Notbad Cook | Bi-Wkly | Married | 1 | 1 2,000 | 1111.15 | 100.00 | 1011.15 | 0 | |
| Goodwith Cash | Weekly | Single | 1 | 344.00 | 50.00 | 294.00 | 6.00 | ||
| Wet Hands | Weekly | Single | 1 | 311.76 | 50.00 | 261.76 | 2.00 | ||
| Good Waitress | Weekly | Married | 2 | Yes | 630.00 | 50.00 | 580.00 | 37.00 | |
| Handsome Waiter | Weekly | Single | 1 | 398.80 | 50.00 | 348.80 | 16.00 | ||
| Know Itall | Monthly | Married | 2 | Yes | 1 2,000 | 3500.00 | 217.00 | 3,283.00 | 87.00 |
| Betty Baker | Weekly | Single | 1 | 344.40 | 50.00 | 294.40 | 0 | ||
| Line Man | Weekly | Single | 1 | 300.00 | 50.00 | 250.00 | 0 | ||
| Talk Alot | Weekly | Single | 1 | 290.00 | 50.00 | 240.00 | 0 |
We used the Income Tax Withholding Assistant Excel Spreadsheet to calculate the amount of federal income tax to withhold from Ma's employee's wages (see below).
Other methods available include the Percentage Method Of Withhoding and the Wage Bracket Tax Table Method. These tables and the employer instructions on how to figure employee withholding are now included in Pub. 15-T, Federal Income Tax Withholding Methods. If you use the wage bracket method, you must find the range the employee’s wages fall under. Then, using the information they entered on Form W-4, find the amount to withhold. The percentage method is a little different. Like the wage bracket method, there is a range that an employee’s wages can fall under. But unlike the wage bracket method, there is both a flat dollar amount as well as a percentage calculation to add together.
How to Use the Tax Withholding Assistant
Open the Tax Withholding Assistant and follow these steps to calculate your employees’ tax withholding for 2020. Be sure that your employee has given you a completed Form W-4. The Assistant can accommodate both the 2020 Form W-4 and Forms W-4 from prior years.
You will want to save a separate copy of the spreadsheet for each employee.
- Indicate how frequently you pay your employee.
- Specify which version of Form W-4 applies to the employee.
- Enter the requested information from your employee’s Form W-4.
- Save a copy of the spreadsheet with the employee’s name in the file name.
- Each pay period, open each employee’s Tax Withholding Assistant spreadsheet and enter the wage or salary amount for that period. The spreadsheet will then display the correct amount of federal income tax to withhold.
Payroll Worksheet
For Calculating Employee Social Security, Medicare Deductions, and State Tax Deductions
| Employee | Total Gross | Medical Pre-Tax Ded | Adjusted Gross | Soc Sec Rate 6.2% | Social Security | Medicare Rate 1.45% | Medicare | State Tax 10% |
| Fat Chef | 1567.32 | 100 | 1467.32 | 1467.32 x .062 | 90.97 | 1467.32 x .0145 | 21.28 | 157 |
| Notbad Cook | 1111.15 | 100 | 1011.15 | 1011.15 x .062 | 62.69 | 1011.15 x .0145 | 14.66 | 111 |
| Goodwith Cash | 344.00 | 50 | 294.00 | 294 x .062 | 18.22 | 294 x .0145 | 4.26 | 34 |
| Wet Hands | 311.76 | 50 | 261.76 | 261.76 x .062 | 16.23 | 261.76 x .0145 | 3.8 | 32 |
| Good Waitress | 630.00 | 50 | 580.00 | 580.00 x .062 | 35.96 | 580.00 x .0145 | 8.41 | 63 |
| Handsome Waiter | 398.80 | 50 | 348.80 | 348.8 x .062 | 21.63 | 348.8 x .0145 | 5.06 | 40 |
| Know Itall | 3,500.00 | 217 | 3283.00 | 3283 x .062 | 203.55 | 3283 x .0145 | 47.60 | 350 |
| Betty Baker | 344.40 | 50 | 294.40 | 294.40 x .062 | 18.25 | 294.40 x .0145 | 4.27 | 34 |
| Line Man | 300.00 | 50 | 250.00 | 250 x .062 | 15.50 | 250 x .0145 | 3.63 | 30 |
| Talk Alot | 290.00 | 50 | 240.00 | 240.00 x .062 | 14.88 | 240.00 x .0145 | 3.48 | 29 |
These Payroll Taxes are calculated by multiplying the tax rate times the adjusted employee earnings.
Did you notice we reduced the amount subject to the tax for the Pre-Tax Medical Deduction ?
Why did we deduct medical insurance from the earnings before we calculated the income tax, social security, and medicare deductions ? If you recall, one of our assumptions about Ma's restaurant was that Ma pays 50% of a family's premium for health insurance and her medical plan qualifies with the IRS for tax-exempt treatment. This deduction for the employee's share of the medical insurance premium thus qualifies for special tax treatment.
This special type of deduction is called a pre tax deduction. Pre tax deductions (benefits) are those benefits deducted from an employee's wages (gross pay) before taxes come out. The medical insurance deduction in our example is made on a pre tax basis, thereby reducing the our calculated amounts deducted for social security, medicare, and federal and state income taxes.
What's so special ?
By deducting these special types of deductions before we calculate the payroll taxes and income tax withholdings, the employee has more take home pay ( a bigger net pay check). The employer also saves on their social security and medicare matching contributions. This also provides a savings to employers for unemployment taxes.
By deducting these special types of deductions before we calculate the payroll taxes and income tax withholdings, the employee has more take home pay ( a bigger net pay check). The employer also saves on their social security and medicare matching contributions. This also provides a savings to employers for unemployment taxes.
Some examples of pre tax benefits that are offered by employers are:
- health and dental insurance premiums
- employee retirement plans such as 401k contributions
- group term life insurance
- dependent care programs
- medical reimbursement accounts
- disability benefits
Payroll Worksheet
For Summarizing Employee Gross Pay and Deductions
Bringing It All Together
| Employee | Total Gross | Social Security | Medicare | Inc Tax With | State Tax | Medical Pre-Tax | Savings Bonds | Tip Credit | Uniform |
| Fat Chef | 1567.32 | 90.97 | 21.28 | 34 | 157 | 100 | 25 | 25 | |
| Notbad Cook | 1111.15 | 62.69 | 14.66 | 111 | 100 | 20 | |||
| Goodwith Cash | 344.00 | 18.22 | 4.26 | 6 | 34 | 50 | |||
| Wet Hands | 311.76 | 16.23 | 3.8 | 2 | 32 | 50 | |||
| Good Waitress | 630.00 | 35.96 | 8.41 | 37 | 63 | 50 | 250 | ||
| Handsome Waiter | 398.30 | 21.63 | 5.06 | 16 | 40 | 50 | 50 | ||
| Know Itall | 3,500.00 | 203.55 | 47.60 | 87 | 350 | 217 | |||
| Betty Baker | 344.40 | 18.25 | 4.27 | 34 | 50 | ||||
| Line Man | 300.00 | 15.50 | 3.63 | 30 | 50 | ||||
| Talk Alot | 290.00 | 14.88 | 3.48 | 29 | 50 |
If you recall, we discussed the Types Of Deductions in an earlier lesson. We classified deductions into three categories:
- Deductions Required by Law
- Deductions for the Employer's Convenience
- Deductions for the Employee's Convenience
Let's classify our deductions in our table above into our three categories.
Required By Law
- Social Security
- Medicare
- Federal Income Tax
- State Income Tax
Employer's Convenience
- Uniforms
- Tip Wages
Employee's Convenience
- Medical Insurance
- Savings
- U. S. Bonds
What's Next ?
Payroll Records