Which of the following is not classified as a voluntary deduction
What Is a Payroll Deduction Plan?A payroll deduction plan refers to when an employer withholds money from an employee's paycheck for a variety of purposes, but most commonly for benefits. Payroll deduction plans may be voluntary or involuntary. One common example of an involuntary payroll deduction plan is when an employer is required by law to withhold money for Social Security and Medicare. Show
A voluntary payroll deduction plan happens when an employee opts for—and gives written permission to—an employer to withhold money for certain purposes, such as a retirement savings plan, healthcare, or life insurance premiums, among others. Key Takeaways
How a Payroll Deduction Plan WorksPayroll deduction plans offer employees a convenient way to automatically contribute income toward an ongoing expense or investment. For example, it is common for employees to deduct a set percentage of income and contribute it to their traditional Individual Retirement Account (IRA) or Roth IRAs. An employee may also choose to have the premiums from an insurance policy deducted from their pay, ensuring that payment is never missed. Some payroll deduction plans may also involve the voluntary, systematic payroll deductions to purchase shares of common stock. In such cases, the employee opts into their employer's stock purchase plan and a portion of each paycheck goes to buying shares of their employer's stock, generally at a discounted price. In an example provided by the Securities and Exchange Commission (SEC) regarding the Employee Stock payroll Deduction Plan at Domino's Pizza, Inc., eligible employees may opt to allocate 1-15% of their paycheck to buying company stock priced at 85% of the fair market value of the date the option is exercised. Examples of Payroll Deduction PlansSome common voluntary payroll deduction plan examples include:
Some common involuntary payroll deduction plan examples include:
Pre-Tax DeductionsPre-tax deductions are subtracted from an employee's gross salary before taxes and social security are calculated. These deductions are commonly used to pay for health insurance, life insurance, health savings accounts, or retirement plan contributions. You may also be eligible to deduct up to $260 for commuting expenses. Since the income to pay for these deductions is not taxed, they can reduce the employee's overall tax burden and provide an additional incentive to participate in these programs. Traditional vs. Roth IRAContributions to a traditional IRA are made with pre-tax income, lowering your overall tax burden. Roth IRA contributions use post-tax income, but you will not have to pay taxes on distributions. How to Calculate Payroll DeductionsThere are two types of payroll deductions: pre-tax and post-tax. To calculate an employee's take-home pay, the first step is to subtract any pre-tax deductions from their gross income, such as insurance deductions or certain retirement contributions. The difference is the employee's taxable income. Next, calculate the employee's tax withholding, based on their taxable income. This includes federal, state, and local taxes, as well as Social Security and Medicare withholdings. Finally, subtract the employee's after-tax deductions, such as union dues, certain employee expenses, or any wage garnishments. Roth IRAs are also post-tax, meaning contributions are made with taxable income. After all these deductions, the result is the employee's net income, which should be reflected in their final paycheck. Special ConsiderationsPayroll deductions are a little more complicated when it comes to tipped income. Tips must be recorded on a daily basis, and if you earn more than $20 in tips in a month, that sum must be reported to your employer on Form 4070: Employee's Report of Tips to Employer. The combined tips and wages are subject to payroll taxes and deductions, just like any other employee's salary. In addition, employers in tipped industries are also responsible for ensuring that employee tips are equal to at least 8% of the business's total revenue for the same period. If tips do not equal 8% of total revenue, the employer is responsible for paying the difference to their employees. Employers can also request a lower percentage, but no lower than 2%. What Does FICA Stand for in the Payroll Deduction Process?What Does FIT Stand for in the Payroll Deduction Process?FIT, or the Federal Income Tax, is a tax levied by the Internal Revenue Service on personal or corporate income. This is typically the largest deduction on the average person's income statement. What Is an OASDI Payroll Deduction?When Do Social Security Payroll Deductions Stop?The Social Security tax, or OASDI tax, charges 6.2% of net earnings, but only for earnings below the Social Security Tax Limit. As of January 2022, the tax limit will be $147,000 (it was $142,800 for 2021), meaning any income above that level will not be taxed. What Is a Section 125 Deduction for Payroll?A Section 125 Plan, also known as a Cafeteria Plan, is an employer-sponsored benefit that allows employees to pay for their expenses with pre-tax income. These plans may be used to cover medical costs, child care, or other recurring expenses. Since Cafeteria Plans reduce tax burdens for both employees and employers, there are clear advantages to having such a plan. The Bottom Line Payroll deduction plans are used to support employee benefits by subtracting the payments directly from an employee's paycheck. Although the calculations for these deductions can be confusing, they also simplify the process and ensure that healthcare, retirement, and insurance payments are made promptly and without delay. In
addition, some deductions are also made with pre-tax income, which can have a sizeable impact on employee tax burdens. What is not a voluntary deduction?Deductions are subtracted from an employee's gross pay based on established rates as well as employee requests for voluntary deductions. For payroll purposes, deductions are divided into two types: Voluntary deductions. Involuntary (mandatory) deductions: taxes, garnishments, and fines.
Which of the following is a voluntary deduction?Mandatory deductions: Federal and state income tax, FICA taxes, and wage garnishments. Post-tax deductions: Garnishments, Roth IRA retirement plans and charitable donations. Voluntary deductions: Life insurance, job-related expenses and retirement plans.
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