Paycheck Deductions

An Overview of Paycheck Deductions

Knowing what money and benefits you are entitled to receive, as well as what taxes and other deductions will be taken out of your paycheck are important. Once you are familiar with these items, be sure to review each paycheck for accuracy.

Exempt versus non-exempt status

Employees are classified as exempt or nonexempt, and your company will provide information on which category you fall into based on your duties. If you have a higher status within a company, it’s more likely that you are an exempt employee.

Government employees – at the local, state, and federal levels – and those in positions of authority are typically exempt. Those who work on commission, such as employees in retail, sales, or service jobs are also commonly exempt. Exempt employees are paid on a salary, not hourly, basis.

According to The Fair Labor Standards Act, if you are a nonexempt employee and over the age of 20, you must be provided a minimum hourly wage. The minimum wage is currently $7.25 per hour, plus overtime pay for every hour over 40 hours in one workweek. Employees under the age of 20 must be paid $4.25 an hour for their first 90 days, and then the standard wage of $7.25 thereafter.

It is still possible for nonexempt employees to receive a salary, but it must be at least the same rate as the minimum wage and overtime pay. To determine if your salary meets the requirement, divide your salary (per week) by the number of hours worked, and make sure it is at least the same or above the set minimum wage.

Smaller companies do not fall under The Fair Labor Standards Act, but some states have similar laws to protect your wage. If your company must abide by both federal and state laws regarding minimum wage, and the amount differs, then it is required for them to pay whichever wage is higher.

Overtime

Nonexempt employees are entitled to overtime pay for every hour over 40 hours within a single workweek. The amount of overtime pay should equal one and a half times the regular amount of pay for each overtime hour. In some cases, local and state governments can instead allow 1.5 hours of work off for each hour of overtime you work. This rule applies to local and state government employees.

An example of how overtime pay works: if you work 50 hours during a week, you worked 10 hours over the regular 40, so 10 are considered overtime. If you are paid $12 an hour for regular hours, you will be paid $18 for each overtime hour (1.5 x $12). For that particular week, you would earn (40 x $12=$480) for your regular hours and (10 x $18=$180) for your overtime hours, for a total of $660.

Tips

If you have a job as a waiter, waitress, or bartender, you may be considered a tipped employee if you receive $30 or more in tips per month. If your tips average a minimum of $5.12 per hour, then your employer only has to pay the difference between that and minimum wage, which equals $2.13 an hour.

If not, your employer has to raise the rate to ensure you receive at least minimum wage. It’s important to note that a service charge does not count as a tip, as it is part of your regular wage.

If you are a tipped employee you are required to report all income, including tips, to your employer. Money earned from tips is taxable income. If you earn less than $20 in tips per month, however, you do not have to report it as part of your income.

Taxes

All U.S. employees and U.S. citizens who work in other countries are required to pay federal income tax, which is money owed to the federal government, collected by the Internal Revenue Service (IRS). Your employer will calculate how much tax you owe based on the IRS’s withholding tables, and depends on the following:

  • Filing status (single, married and filing jointly, or married and filing separately)
  • Your pay interval (weekly, biweekly, or monthly)
  • Gross pay
  • Deductions

Most states also require an additional income tax; seven do not (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming). Depending on your residence, you may also owe taxes to your county, city, and school district. Your employer can collect all of these taxes by withholding a portion of your pay and sending it directly to where it is required.

Benefits

Your employer may offer benefits. Here is a brief explanation of some of the most common benefits.

  • Health insurance: Most employers will only pay a certain percentage (and you will have to cover the rest). Some plans will include dental and vision as well.
  • Retirement: You may have the option to contribute to a retirement plan like a 401(k) and have the amount you wish to be automatically deducted from each check (before taxes).
  • Life insurance: A life insurance will ensure any beneficiary you designate will be provided for in the event of your passing. Your employer might cover a certain amount and give you the option to contribute more.
  • Disability insurance: In the event of illness or injury, this provides you income when you cannot work.

For more information about understanding your paycheck, including frequency, method and more – check out our free download here;

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