The Ultimate Guide to Standard Payroll Deductions for Small Businesses

When you took a leap of faith and started your small business, you knew what you wanted to achieve and the difference you wanted to make. That’s what makes entrepreneurship so exciting — you never truly know the full potential of your idea until you put it into action.

However, other aspects of owning a small business aren’t as exhilarating, like staying on top of billing and paperwork (it piles up so fast!).

Administrative tasks can be especially challenging for entrepreneurs who have recently decided to scale their businesses and expand their teams, as this means establishing and maintaining an effective payroll process. Employee salaries, attendance, hours, expenses, and taxes all need to be accounted for consistently and continuously.

And then there are standard payroll deductions, another crucial yet time-consuming payroll process added to your plate. But with all the other moving parts of running your business, you may be wondering…

What If There’s a Better Way to Pay?

Imagine if payroll could be as easy as texting a friend. How would that make your life better?

With Roll by ADP, we’re on a mission to prove payroll doesn’t have to feel like a chore. If you’re a small business owner looking for a payroll solution that’s fast, affordable, and highly-rated, we’re confident we’re the payroll app for you.

Our revolutionary chat-based technology calculates, deducts, and pays taxes with just a few clicks. If you know how to text, you know how to run payroll with Roll.

Here’s a quick look at what you can do with our app:

Pay Employees Across The Country

Roll is capable of paying employees in all 50 states, so no matter where your team members are, you can ensure they’re paid on time, every time.

Automate Your Tax Statements

Year-end reporting is a task many business owners dread — but we’re fixing that! Roll will automatically pull your reports every January and even send them to employees or stakeholders (just use the proper contacts and let us handle the rest).

Enjoy Done-For-You Deductions

Roll will take care of federal, state, and local taxes for you. No, you’re not dreaming. We built our platform with powerful AI technology capable of handling all the details. All you need to do is Roll with it!

With a little knowledge and the right systems in place, you can alleviate a substantial majority of your paperwork-related stress. Plus, we’re here to share all the information you’ll need.

Here’s our complete guide to standard payroll deductions so you can focus on what matters most: running your business.

What is Payroll Deduction?

Payroll deductions refer to any earned wages that are held back on an employee’s paycheck, either because it’s required by law or because an employee has opted to have the funds subtracted from their net pay and dedicated to another purpose.

What are the Standard Payroll Deductions?

Payroll deductions can generally be categorized into two different types:

1.   Mandatory Deductions

If an employee is obligated by law to contribute to a specific fund, it is considered a mandatory payroll deduction.

Let’s take a closer look at what payroll deductions are required by law:

FEDERAL INCOME TAX

All employed US citizens are required to pay a portion of their income to the Internal Revenue Service (IRS) as part of their federal payroll deductions. The percentage required varies depending on the person’s annual gross income (the more they earn, the more they pay).

Federal income taxes are used by the government to pay for national infrastructure improvements, military budgets, education funds, and more.

SOCIAL SECURITY AND MEDICARE

Social security, otherwise known as the Old-Age, Survivors, and Disability Insurance (OASDI) Program, is a federal fund that all employed Americans pay into. The fund offers financial assistance to retirees, those who are disabled, family members who support a loved one living with a disability, and the partners or children of an individual who is deceased.

Since nearly every American citizen benefits from social security at some point in their lives (70 million people received social security benefits in 2021 alone), it is considered a mandatory requirement.

Social security payments differ from income tax payments because they do not fluctuate based on your annual net income. Instead, every citizen pays 6.2 percent of their earnings up to the maximum taxable income of $147,000. The only exception is for self-employed individuals who must pay 12.4 percent.

STATE INCOME TAX

Each individual state is responsible for a wide range of expenses, including health and hospital budgets, highway and road construction, and the upkeep of parks and green spaces.

These costs are largely covered by state income tax contributions from local residents, which vary depending on which state you live in. California, Hawaii, New Jersey, Oregon, and Minnesota had the highest state income tax rates in 2021, for example, while Alaska, Florida, Texas, and a handful of other states do not levy income tax at all.

It’s important for entrepreneurs to familiarize themselves with their local state income tax rates in order to confidently maintain compliance when calculating payroll deductions.

WAGE GARNISHMENTS

If an employee has been ordered by a court to make child support payments, if they have failed to pay rent to a landlord, or if they haven't met the terms of a bankruptcy agreement, the government can require their employer to garnish these wages from each paycheck they receive. There are some federal stipulations business owners will need to be aware of in these situations.

Firstly, federal law limits garnishments up to a 25% maximum of a person’s net income. Secondly, employers are responsible for documenting the amount of wages withheld and reporting these figures to creditors. If creditors aren’t informed within 15 days of the employee’s previous pay period, it’s possible the business owner could be subjected to penalties.

Garnishment limits are higher for child support payments. In these cases, the maximum limit can be as high as 60% of an employee’s net income, depending on whether or not they are currently supporting another child.

FEDERAL UNEMPLOYMENT TAX

It’s always important to account for unemployment tax under the “statutory deductions meaning” umbrella. It’s one of the most-used types of mandatory payroll deductions. In fact, approximately 25 million people received unemployment benefits in 2021.

In America, unemployment tax is technically considered a joint federal-state program, since states are responsible for implementing and managing the program, but policies and guidelines are established at the federal level.

An employee must have lost employment through no fault of their own to qualify for unemployment benefits. They must also have worked a minimum number of hours prior to filing a claim, and they have to meet any requirements implemented at the state level. Business owners should have a foundational understanding of all applicable rules and regulations within their jurisdiction.

2.   Voluntary Deductions

Now that you know what a mandatory payroll deduction is, let’s discuss which payroll deduction is considered voluntary, as there are several different answers.

Below are a few of the most common voluntary deductions:

GROUP INSURANCE

All employee life insurance, health insurance, and disability insurance plans are categorized as voluntary deductions. Even though it’s considered standard practice to offer an employee benefits package, team members are not obligated to opt into an insurance plan, and therefore it isn’t a mandatory deduction.

Employers need to account for employee benefits when determining what deductions are taken out of a paycheck because, ultimately, they are the ones footing the bill. When employee benefits are accurately calculated and monitored, business owners can mitigate the risk of overpaying for benefits employees aren’t using, as well as the risk of employees fraudulently making claims.

UNION DUES

We often associate unionized workers with large corporations, but there are occasions when employees of small businesses exercise their right to unionize, and when they do, employers have to know how to incorporate union dues into their payroll deduction plan.

Most union membership agreements dictate that the employer is responsible for deducting union dues at the end of each pay period. They may also be responsible for keeping track of any employees who have failed to pay their dues. So, despite being a voluntary deduction, there is some obligation on employers to manage finances as they relate to unionized workplaces.

401K Contributions

Employees are permitted by law to contribute to a company-sponsored 401K retirement plan. Doing so is tricky, however, because even though 401K plans must be accessible to employees by law, they remain optional — the employee can choose to contribute or not. This is why 401K contributions are considered a voluntary payroll deduction.

Not all 401K payroll deductions are the same for all employees — it depends on the amount they choose to invest. The United States Government does impose an annual maximum (which will be $22,500 in 2023), but it’s entirely up to the employed individual how much or how little they want to have deducted.

Business owners need to have a firm grasp on their 401K plan since the fees and expenses associated with maintaining the plan are tax deductible. Additionally, if you have committed to matching the contributions of your employees (which many employers do), you’ll need to make sure these amounts are meticulously recorded for future bookkeeping.

You now know which standard payroll deductions you need to account for when paying your employees. The next step is to find systems and solutions that make calculating these deductions as simple and as straightforward as possible.

Here’s a surprising statistic: 29% of businesses use a payroll system that is at least 10 years old.

These outdated systems make completing basic tasks harder than it needs to be. Investing in a platform that functions exactly as you need it to, when it matters most, is essential to taking the pain out of paying your team.

Are You Ready to Roll?

We want you to feel good about partnering with our revolutionary payroll app for small businesses, so we’re offering a free 3-month trial to new customers. You’ll get access to all the features we offer, and there’s absolutely no obligation to renew after the 3-month period. It’s not too good to be true! It’s just how we show small business owners we care. Start your free trial today!