Page 180 - Budgeting for Managers

Budgeting and Human Resources
are several other items that might be added to a paycheck. The
general categories are listed here:
• Pre-tax withholding. Certain benefits, such as retirement
plans and some health insurance, can be taken out of 163
the paycheck and paid directly to retirement accounts or
insurance before taxes are deducted. The employee gets
a smaller paycheck, but also pays less tax each year
and gets the additional benefit.
• After-tax withholding. Some additional amounts may be
withheld after tax deductions, because the money is
being sent to a special account, but it is taxable. Union
dues and charitable contributions might be examples.
• Additional taxes. The federal tax amount will vary
depending on the employee’s exemptions based on the
number of dependents (family size and other factors).
State and local taxes may apply. Unemployment insur-
ance (FUTA—Federal Unemployment Tax Act) will usu-
ally be withheld, but this is paid by the employer, not by
the employee.
• Bonuses, commissions, variable hours, and overtime.
These items might change the gross pay on a paycheck.
Since tax rates vary with the pay rate, they can also
change the withholding amount and even the withholding
percentages.
Table 10-2 illustrates one of these items, a pre-tax deduction
for insurance. The employee pays for the insurance, so it’s deduct-
ed from his or her pay. But it’s a tax-free benefit, so it’s deducted
before taxes are calculated. Taxes are calculated on only $465,
instead of $500, reducing the amount of taxes withheld.
Table 10-3 shows what the last check of the year for the
same employee might look like if the employee received a
$5,000 bonus. This shows why it’s important to explain payroll
and deductions to your team members. Imagine how an
employee will feel if he or she is expecting a $5,000 bonus and
then gets a check for only $4,573.25!