Calculate Payroll Deductions
Payroll is the process of calculating the employee's salary. In other words, it is the sum of all financial records of employees—salaries, wages, bonuses, other payments, and all deductions.
The steps in calculating payroll deductions are:
- Determine the gross pay, including overtime payments.
- Deduct statutory cuts such as federal income tax, FICA Taxes (social security and Medicare), state income tax, and other taxes.
- Check for any wage garnishment orders.
- Deduct voluntary deductions such as 401(k) plans, deferred compensation plans, dependent plans, flexible spending fees, loan repayments, union payments, parking fees, tuition fees, uniforms, bond purchases, health care premiums, charitable contributions, and other voluntarily deductions, based on and employee's authorizations contained in the payroll deduction permission slip submitted by the employee.
The deductions need not however take place in this order. For instance, deduct 401(k) plans, if applicable first, for income tax is applicable only for the left over pay after 401(k). For more clarity on this issue, read this employer's guide on how to calculate payroll deductions.
Payroll Deduction Permission Slip
From Bright Hub's media gallery, you can download this free sample of a payroll deduction permission slip or payroll deduction authorization form. The slip is generic and is applicable to all companies across all employees.
Strike out the line headings not relevant, and add relevant headings. If using this form online or distributing through e-mail, make the necessary changes in line headings before distribution to employees. For instance, if the employee is not opting for 401(k) but paying parking fees through payroll, remove the 401(k) reference and add parking fees as one of the line entries.
Administering a payroll scheme is complicated and requires good coordination. A proper system of collecting payroll deduction permission slips is essential to prevent issues such deduction errors, duplicate deductions, irregular deductions and other faux-pas. A good practice is to make a provision in the payroll database to record the information contained in the permission slip, and set time bound standing instructions to effect the deductions. Numbering each slip as they come in, and maintaining a log of the various slips submitted by different employees helps in tracking the slips.
One important point to clarify is the time required for the deductions to take effect. As a general rule, any payroll deduction permission slip / payroll deduction authorization form received during one payroll processing period would activate from the next payroll processing period. There is however no hard and fast rule regarding this, and this usually depends on the convenience of the payroll department, very often dependent on the size of the company.
Before proceeding with the deductions, make sure that the quantum of the deduction or the nature of the deduction does not violate any labor laws. For instance, payroll taxes come under the employer’s account, and securing a payroll deduction permission slip that authorizes the company to deduct payroll taxes from the employee’s payroll is both illegal and invalid.
- "Payroll Deduction Authorization Form." Retrieved from https://www.colorado.gov/DPA/dfp/sco/payroll/deductions/PayrollDeductAuthForm02-08.pdf on 18 February 2011.
- "Payroll Deductions and Reductions." https://www.ofm.wa.gov/policy/25.50.htm. Retrieved 18 February 2011.
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