Tax season is approaching, and new business owners may be wondering what needs to be done. Luckily, there are many options for calculating taxes and deductions.
First, we should define payroll deductions. A payroll deduction is an amount withheld from a paycheck each pay period. These include voluntary deductions like insurance and retirement savings and mandatory deductions required by law.
It is essential to calculate these deductions correctly. Failure to do so confuses and causes problems for employees (if misreported) and may result in penalties and fees.
Fortunately, there are ways to avoid all of these common issues. Here is what you should know regarding how to calculate payroll deductions:
Benefit-related deductions – This includes insurance covered by the employer, employee compensation for transit, boarding and so on. Most things listed as a benefit for the job are included in these deductions (e.g. dental, medical, life insurance).
Federal income taxes – These are taxes taken by the IRS on earnings. The government uses them to pay for the upkeep of infrastructure and other social matters.
FICA taxes- Taxes withheld for Social Security and Medicare. This tax earns you credit for Social Security benefits in the future.
State and local taxes- Like federal taxes, these taxes are used to fund services like schools, garbage collection and city/state maintenance.
Garnishments- These taxes are used to pay off debts like child support. This is in place to help these debts to be paid promptly.
To accurately calculate payroll deductions, you can follow these steps:
With payroll software, you enter critical information for all employees: salary or wages, frequency of pay, tax withholdings, benefits and so on.
When you run payroll, the system will calculate the deductions for you. This option alleviates the more complex parts of calculating deductions.
Some businesses may opt to hire an accountant or someone with a mind for finance to help them with payroll deductions. Several companies specialize in payroll that you could hire to help with the process.
Conclusion: A Process Made Simple With Easy-to-Follow Steps
Managing the payroll process for your business takes time, and learning how to calculate payroll deductions can feel intimidating at first. With time, however, it becomes almost instinctive.
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