If you work in payroll or HR, chances are at some point you will be approached by a fellow colleague inquiring about their paycheck. This conservation will vary from employee to employee depending on their hourly rate, benefit elections, tax localities and so on. While it is not your job to make sure the employee knows exactly how to read their paystub, it is in everyone’s best interest for you to be able to guide them as to why certain amounts are being withheld.
Setting Up New Employees For Success
When onboarding a new employee it is important to make sure they have the resources they need from the start; new hire documents such as your W-4 and your I-9 can be confusing, so providing additional literature to guide the employee can reduce withholding errors later on. While you cannot legally give advice on withholding elections you can certainly provide additional resources to educate the employee on what their options are. There are several IRS withholding calculators online that can be utilized to help employees determine what to claim on their new hire forms. Some onboarding software platforms may also have this available as well. If you’re not currently using onboarding software you can find a withholding calculator on the IRS website.
Breaking Down Federal & State Taxes
Even if your employees are aware of local and state tax withholdings, they likely do not know the exact percentage that is being held from their check. Be sure to take the time to educate your employees about the different tax localities and how it impacts their pay. What happens if they live in one city and work in another? Depending on where you live, you may or may not be taxed by the city, county, or even school district. Income tax can be calculated in a few different ways. However, two of the more popular methods are the percentage method and the wage bracket method. Both methods utilize the IRS federal income tax withholding tables and factor in things such as marital status, pay frequency, allowances claimed, and your gross pay. Walking your employees through this will allow them to understand how they are being taxed and how they can keep up with their withholdings as their elections change throughout the years.
Breaking Down Employment Taxes
Employees should also be aware of the rate at which they are taxed for employment taxes. Social Security and Medicare taxes are classified as employment taxes and will be taken out of each check in order to pay living expenses later in life. Employees should know that no matter their pay rate, they will see a flat percentage come out in order to cover employment taxes. Social Security will withhold 6.2%, while Medicare will withhold 1.45% of your gross pay. In total, employees will be taxed 7.65% of their gross pay for employment taxes. If an employee is making upwards of $118,500, you should note that they will not pay Social Security tax on any amount larger than $118,500, though they will still pay Medicare tax, as there is no cap. If you have employees that make more than $200,000, they will see an extra .9% of their pay be contributed to Medicare tax.
Involuntary deductions will likely need explanation due to the nature of the deduction. Since these deductions are taken directly from the paycheck without employee consent they may not be aware of what the deductions are. Many times the pay stub will list out a description of the deduction. For example if it is a child support payment the check stub will say “FOC” to signify Friend of the Court. Be sure to inform the employee that this deduction will be withheld unless further action is taken on their part. Knowing the various involuntary deductions that employees could face will allow you to better aid them should they have a question about an unknown code on their check.
Other Pay Deductions
These will be less complicated to explain to employees because they likely had a very active part in these deductions. Benefit deductions such as health insurance, 401(k), FSA, HSA, etc., are those deductions the employee elected for so it tends to be less confusing. If employees have questions on these deductions you can simply refer them to their benefit plan/selections and see how much they chose to contribute (or how much their health coverage costs). The only area that could potentially need a bit more explanation would be pre-tax deductions vs. post-tax deductions and how that factors in.
Please note that this is not an inclusive list of all deduction types, rather a list of common deductions your employees may face.
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