What are deductions and withholdings?
Deductions and withholdings are both ways the government takes money out of your paycheck. Deductions are voluntary, while withholdings are not. They both help the government fund its programs, but they work a little differently.
Deductions include a range of benefits that the employee either pays for completely or pays a portion of. This may include their 401K contributions, insurance premiums, flexible savings accounts (FSAs), profit sharing, garnishments, and other items.
In the US, federal and state income taxes are withheld from all employee paychecks. The amount withheld is determined by the number of exemptions an employee enters in their W-4 form when they're hired.
Types of Payroll Withholdings and Deductions
1. Federal Income Tax - Some people choose to have a set percentage taken out of their paycheck each month, while others choose to have a specific dollar amount withdrawn. Whichever method you choose, it's important to stay up-to-date on your estimated tax payments so you don't end up with a large bill come tax season.
2. State Income Tax - State taxes are a necessary part of living in a state. The amount of state tax you pay depends on your income and what state you live in.
3. Social Security (FICA) - The Social Security tax is a mandatory contribution that employees must make out of every paycheck. The money collected from these taxes goes toward providing retirement and disability benefits for workers.
4. Medicare Tax (FICA) - Medicare is a social insurance program that helps people 65 and older, as well as some disabled people, pay for health care. It is funded by a payroll tax, which is split between employers and employees.
5. Insurance Policy Deductions - Employees will see a deduction on their paychecks every month for the amount they owe for their health, dental, or vision care policy. This helps to ensure that employees are paying for their benefits each month.
6. Retirement Deductions - Contributing to a 401(k) or 403(b) retirement plan can help reduce your taxable income since the contributions are made before taxes are taken out. This means you'll have less income to pay taxes on, which can result in a lower tax bill.
No matter how you slice it, payroll withholdings and deductions can be a major pain. This article has hopefully helped to clarify some of the common questions and confusion around these topics. If you still have any questions or need help filing your taxes this year, don't hesitate to reach out to us for assistance.