The take-home pay you receive from working as an employee is lower than your actual earnings because employers make various payroll deductions. A standard payroll deduction is a mandatory reduction of pay to cover tax liability. Mandatory deductions can vary from one state and worker to another, but federal taxes account for the majority of mandatory deductions.
Federal and state income taxes constitute the largest mandatory payroll deduction for many workers. Employers are required to withhold a portion of your pay and send it to the government cover your income tax liability. Your federal income tax withholding rate is determined by your annual income and the information you provide when you fill out Form W-4. Form W-4 is a tax form an employer must provide to you when you first take a job so that you can set up your tax withholding.
The Social Security system that provides retirement and disability benefits to U.S. employees is funded by a payroll tax that deducts money from your paycheck. The Social Security tax rate is 4.2 percent for employees and 6.2 percent for employers on the first $110,100 of income earned for the 2012 tax year. Income earned in excess of $110,100 is not subject to Social Security tax. As of November 2012, the employee Social Security tax rate is set to increase to 6.2 percent for the 2013 tax year, unless congress extends a 2 percent payroll tax cut.
Medicare provides health insurance benefits to elderly individuals, and like Social Security, it is funded with payroll taxes. The Medicare tax rate is 1.45 percent for both employees and employers. Unlike the Social Security tax rate, there is no income cap on who pays Medicare tax, so all workers pay the same proportion of earnings to Medicare.
Union Dues and Fees
Unionized workers typically have to pay monthly fees called dues to maintain union membership. New union workers may also be required to pay one-time union initiation fees to join unions. Union dues and initiation fees may be automatically deducted from pay.
While standard payroll deductions occur automatically, many payroll deductions are voluntary. For example, if you choose to contribute money to a retirement plan that comes out of pretax earnings, such as a 401(k) plan, your contributions are deducted from your pay. Other optional payroll deductions include health savings account contributions and flexible spending account contributions.
- Bankrate.com: Payroll Deductions Calculator
- Washington State Office of Financial Management: Payroll Deductions and Reductions
- Social Security Administration: 2012 Social Security Tax Rate and Maximum Taxable Earnings
- Internal Revenue Service: Tax Withholding for 2012
- The New York Times: Payroll Tax Cut Is Unlikely to Survive Into Next Year
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.