Whenever employees are paid for their labor, deductions must be made for a number of reasons. There are three deductions commonly made in the United States: deductions which are required by law on the federal and state level, deductions for the employer’s convenience, and deductions for the employee’s convenience.
As required by law, deductions from employee pay is given to Social Security for retirement. This amount is calculated as 7.6% of an employee’s wages, with $118,500 as the maximum taxable as of 2015. Self-employed workers, on the other hand, must pay 15.3% of wages to Social Security. Deductions are also made for Medicare at a rate of 1.45% of wages with no upper limit for a taxable maximum.
Deductions are made for income taxes as a pay-as-you-go model. The first method is withholding, where an employer withholds income tax from payments before it is paid to an employee. In addition to pay, pensions and bonuses may also be liable for withholding. The second method involves estimated taxes not subject to withholding, often from self-employment. Estimated tax may be collected if the tax collected from withholding is not sufficient. Taxes are often withheld at the state level and sometimes at the local level in the pay-as-you-go model. When managing deductions for your business, be sure to know your state and local requirements for income tax.
Other legal claims on wages may include garnishments as a result of a lawsuit or court order. Garnishments may arise for child support, unpaid court costs, unpaid taxes, and defaulted student loans. This can come as one lump sum or monthly installments taken from pay. Note that garnishments vary by state, so it is important to know the laws in your area.
Deductions may also be made for the employer’s convenience. However, note that none of the following deductions can be made if it results in the employee’s gross pay falling below minimum wage. Deductions include over payments, where employees are accidentally paid a higher, incorrect amount. Uniforms or tools used by employees may also be deducted from their pay. If employees have medical examinations or drug tests, the amount may be deducted from pay. Deductions may also arise when employees cause damage to merchandise or if employees steal from the employer.
Finally, deductions can be made to employee pay for the convenience of the employee. For example, pay could be deducted which contributes to medical, dental, and life insurance for the employee. Union dues may be deducted from pay. Contributions to charity as a prior arrangement made between an employer and an employee could also be deducted. Finally, deductions could be made which contribute to retirement plans or savings accounts.