The amount you receive on payday usually represents between 70 percent and 80 percent of what you actually earned, according to GCFLearnFree. Statutory, voluntary and involuntary deductions reduce your net pay. You can change some of the deductions that cause the difference between your gross and net pay, but others, such as garnishments and other involuntary deductions, are mandated by law.
Unavoidable Statutory Deductions
The bulk of your tax withholdings, or statutory deductions, represent payments to state, local and federal governments. Social Security and Medicare taxes fall in this category and may appear on your pay statement as FICA -- Federal Insurance Contributions Act -- if your employer collects them together. If your state imposes an unemployment compensation tax or a disability insurance tax, your statement lists a deduction for it. Your employer calculates all of your statutory deductions except federal income tax withholding using the percentage the law mandates. You can adjust your federal income tax withholding by completing a Form W-4 Employee's Withholding Allowance Certificate.
Federal Withholding Basics
Bankrate recommends revisiting your W-4 information anytime you have a life-changing event such as marriage, divorce, a child or home purchase, or if you received a large tax refund. Your goal is to deduct an amount that closely matches your tax liability. You can change the amount deducted for federal taxes in three ways: • Change your marital status • Increase or decrease the number of allowances you want to claim • Request an extra dollar amount be withheld
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Your number of W-4 allowances drives your withholding. The more you elect, the less money is deducted. You can use the worksheets on the W-4 to calculate how many allowances you need. If you're single, have one job and use the standard deduction when you file your taxes, you can use the Personal Allowance Worksheet, which lets you take two allowances: one for yourself and one for being single with one job. If you itemize and file a Schedule A with your tax return, you can use the Deductions and Adjustments Worksheet. The Two-Earners/Multiple Jobs Worksheet applies if you are single with two jobs, or if you and your spouse both work. If your circumstances change, and you think you will owe a lot more than an allowance adjustment can meet, YoungMoney suggests having an extra dollar amount withheld.
Change Voluntary Deductions
You might be able to reduce or eliminate deductions you elected such as union membership dues, savings bond purchases and charitable donations according to procedures set by your employer. Other voluntary deductions, such as pre-tax deductions, affect your statutory deductions. Pre-tax deductions include your contributions toward health benefits, education savings, retirement savings, child or dependent care and commuter programs. Your employer subtracts them from your earnings before calculating your statutory deductions. This reduces your taxable income and, therefore, how much is deducted in government and FICA taxes. However, because pre-tax deductions have tax implications, you need a qualifying event as defined by your employer, to change them outside of the annual enrollment periods. Otherwise, you can change these types of deductions during the annual enrollment period if, for example, you want to change the amount of money you put into a 401(k) plan.
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- PHR / SPHR Professional in Human Resources Certification Deluxe Study Guide; Sandra M. Reed and Anne M. Bogardus
- Paycor: Help Employees Make the Most of Pre-Tax Deduction
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- IRS: Form W-4 Employee's Withholding Allowance Certificate
- Bankrate: How to Adjust Withholding
- Kiplinger: How to Fill Out a W-4 Form
- Bankrate: Working Through the W-4 Worksheet
- YoungMoney: How to Fill Out a W-4
- University of Minnesota: Office of Human Resources; Before-tax and After-tax Deductions
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