Deductions from paychecks include federal, state and local income taxes, FICA payroll taxes and amounts that employers withhold to cover the employee's portion of a health insurance premium, contribution to a 401(k) plan or other items. The amounts of money withheld from an employees' paycheck are itemized, or listed on the pay stub. The law requires employers to deduct taxes, but other deductions depend on company policies or are determined by employees. Itemized payroll deductions are deducted from gross income. The amount of money left over is net income, which is the amount of an employee's paycheck.
Mandatory Payroll Deductions
Because the government depends on tax revenue to pay its bills, it prefers to collect the taxes on income at about the same time as people earn it. Therefore, the government requires employers to deduct local, state and federal income and payroll taxes on gross income from paychecks. The Federal Insurance Contributions Act, or FICA, mandates deducting payroll taxes to support the Social Security and Medicare programs.
Social Security Payroll Deduction
Only half of the Social Security payroll tax comes out of an employee's paycheck because employer and employee split the full cost of the tax. The full tax amount is 12.4 percent of gross income with 6.2 percent deducted from payroll and the employer adding an additional 6.2 percent when he sends the tax into the federal government. Unlike other mandatory taxes, employees get a break if they earn more than a certain amount. The federal government sets the annual limit for wages subject to the Social Security's Old Age, Survivors, and Disability Insurance tax. For example, the 2010 ceiling limits the Social Security tax on income to the first $106,800 earned, according to the U.S. government, Social Security online website.
Medicare Payroll Deduction
The employee and employer also split the Medicare tax equally. With 1.45 percent deducted from an employee's paycheck, the employer adds the other 1.45 percent and then sends the tax to the federal government. However, since changes to the law in 1993, workers don't get a break with the Medicare payroll deduction. They pay that tax on every dollar they earn.
Discretionary Itemized Payroll Deductions
Payroll deductions for things not required by law vary depending on the employer. But like the deductions required by law, discretionary deductions are also itemized. Among the most common discretionary payroll deductions are the employees' share of a health insurance premium or the employees' contribution to a company-sponsored 401(k) program, or an individual traditional or Roth IRA. Other deductions can include company-sponsored life or disability insurance or pretax dollars to fund a Health Savings Account to be spent on eligible health care expenses not covered by insurance, according to Investopedia, a Forbes digital company.
Visitors Also Saw
How to Deduct Property Taxes Without ItemizingCan the Tax From Buying New Car Be Deducted on Federal Taxes?Hope Credit SpecificationsHow to File Taxes With DependentsHow to Calculate 2008 Income Tax with a FormulaHow to Register a Federal Tax IDHow Does the IRS Determine the Mileage Reimbursement Rate?How to Report a Person Not Filing Income Taxes in MissouriCan You File an Amendment Tax Return While You Are Getting Audited?How do I Figure Pennsylvania Withholding Taxes?