Include payroll deductions on the employee's paycheck stub.
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Even if you hire an employee for just one day, you must pay him through your payroll system. To compensate the employee, start with her gross pay, which includes wages, bonuses and other compensation, then perform payroll deductions. The result is her net pay.
An employee’s gross pay is her wages before you take any deductions out. Gross pay includes all types of compensation, including regular wages; overtime pay; bonuses; commissions; severance pay; and paid benefit days such as vacation, bereavement and sick pay and holidays. Her net pay is her wages after mandatory, or legally required, deductions and voluntary deductions.
Before you deduct from gross wages, figure the employee’s taxable wages. Pretax deductions such as for qualified medical, dental, life and vision insurance; 401(k); and flexible spending accounts; are not taxable, so deduct them from the employee’s pay before you withhold the tax in question. Also, specific wages such as qualified business expense reimbursements for meals, mileage and lodging are nontaxable.
Related Reading: Net vs. Gross Payroll
By law, you must take federal income tax, Social Security tax, Medicare tax, and applicable state and local taxes from your employees’ paychecks. To withhold federal income tax, apply the Internal Revenue Service tax table that goes with the employee’s filing status, wages after allowances and pay period. As of 2013, withhold Medicare tax at 1.45 percent of all taxable wages; an additional 0.9 percent goes for employees whose income exceeds $200, 000 for the year. Deduct Social Security tax at 6.2 percent of wages up to $113, 000 for the year, as of 2013. You may obtain federal employment tax rates from IRS Circular E, the Employer’s Tax Guide. If applicable, use your state and local tax agency’s guidelines for state and local income tax withholding.
Mandatory deductions may include other types of deductions required by state law such as state unemployment tax and state disability insurance, plus those mandated by local laws such as school district tax and city income tax. A wage garnishment is a mandatory deduction; if you receive one against an employee, you must honor it.
Subtract voluntary deductions that are not pretax from the employee’s pay after you withhold taxes. These deductions may include health and life insurance and retirement plans paid with after-tax money, paycheck advances, union dues and wage garnishment. The rest of the employee’s wages is her net pay.
Submit payroll deductions to the proper agencies and companies according to their criteria. Employers typically deposit federal withholding taxes to the IRS on a semiweekly or monthly basis. If you have annual liabilities of $1, 000 or less, the IRS might permit you to pay annually when you file your tax return on Form 944.
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