Payroll system accuracy is critical for companies. Read below to find out how to add deductions to a payroll system. Payroll systems are made up of additions and deductions.
 
Additions include employee pay, bonus, overtime, severance pay and any other monetary incentives.
 
Deductions include statutory and non-statutory. Statutory deductions include federal and state income tax, local tax and compulsory contributions (to Social Security and Medicare). Non-statutory (voluntary) deductions are ones authorized by employees. They can include 401(k) plans, additional insurance, loans, cafeteria benefits, etc. A third category of wage garnishment deductions may also be applicable.
 
When adding deductions, make sure they are in the correct place. Be sure to make any payroll adjustments (such as withholding of excess payments) before adding deductions. These adjustments should be a negative entry.
Additional deduction details:
  • Cafeteria benefits – This is the first deduction to a payroll system. Common choices include health and accident insurance, flexible spending health amounts, adoption assistance, group term life insurance, dependent care help, etc. Provisions should be made for this. These section 125 deductions are exempt from income taxes.
  • Social Security and Medicare – When adding deductions, based on the Federal Insurance Contribution Act (FICA), this is the second in the hierarchy. Social Security deductions are 6.2 percent of the gross pay (subject to an annual cap) and Medicare deductions are 1.45 percent of the gross pay (with no cap). Calibrate the payroll system to make these deductions automatic.
  • 401(k) plans – These employer sponsored retirement savings allow employees to transfer wages (up to 15 percent) before tax, but after Social Security and Medicare, to a retirement fund. This is an optional deduction.
  • Taxes  - Federal income tax deductions are next in line. It’s applicable on gross pay (including basic pay, overtime, tips and commission). To determine this amount, employees use a W-4 form to obtain the filing status and number of withholding allowances. In addition, many states have a state income tax.
  • Voluntary Deductions – Optional, voluntary or company-specific deductions are next. This includes health insurance, life insurance, contributions to company savings plans, recovery of dues, repayment of loan installments, deductions for meals, etc.
  • Wage Garnishments - Courts may order garnishing a percentage of an employee’s disposable income. This is determined as the net income (after taxes and FICA insurance and before voluntary deductions).

 

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Accuracy of payroll systems is critical for all businesses. An automated payroll processing system will make the process hassle free.
Modern Business Associates is an HR company that focuses on payroll and HR outsourcing. We routinely work with clients on payroll system deductions. As a Professional Payroll and HR outsource organization, our clients rely on us to help them effectively deal with these kinds of topics.