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benefits often drop the employee into a lower tax bracket which, in turn, reduces the amount of income tax they must pay. Deductions are taken for the following employee benefits: Healthcare, Vision, and Dental insurance. Insurance is paid for in monthly, quarterly or annual contributions called premiums . Premiums may or may not be deducted from an employee’s paycheck — It all depends on who is paying for the insurance. Some employers pay 100% of the premium, but in most cases the cost is shared between the employee and employer . In that case, the employee’s portion of the premium is deducted from their paycheck in pretax dollars. Retirement plans. A defined contribution plan, such as a 401K plan, is funded by deductions taken from the employee’s paycheck. The deduction is often matched by the employer up to a percentage of the employee’s salary — usually about 6%. Currently, the maximum amount an employee under 50 years old can contribute to their 401K annually is $18,000. Advise students they will learn more about retirement plans in a later lesson. Life insurance. In the event of the death of the employee, life insurance provides money for a beneficiary, usually a family member. Many employers pay for a minimum amount of life insurance, but employees often opt to pay a higher premium to increase the amount of insurance. Deductions for life insurance premiums are commonly taken out of each paycheck. Flexible Spending. Recall that a Flexible Spending Account is a special account into which an employee may contribute up to $2550 of their their salary each year in pretax dollars. The account can be used by the employee for a variety of purposes such as childcare expenses or medical costs not covered by insurance. An employee’s contributions to their flexible spending account (“FSA”) are deducted in pretax income from their paycheck each pay period . Reflect on Learning: What is the difference between withholding and deductions? Answer: While they are all deductions, withholding refers to taxes and FICA benefits. Can you list four common paycheck deductions taken to pay for employee benefits? Answer: The employee’s share of healthcare, vision, and dental insurance premiums, retirement plan contributions, life insurance premiums above what is paid by the employer, and flexible spending account contributions. III. How to Decode a Paycheck Stub Some employees are paid by check which the employee manually deposits into their bank account. However, it is becoming more common for employees to be paid by electronic deposit of their pay into their bank account. This is called direct deposit . Either way, the employee receives a paycheck stub which provides itemized details of the employee’s gross pay for the pay period, and all amounts that were withheld for taxes and deducted for benefits. The paycheck stub contains a lot of important financial information which you or your accountant may need when you are preparing your 1040 Tax Return (see above) or even applying for a loan. Paycheck stubs should be reviewed and saved in a drawer or file. PRODUCT PREVIEW
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Chapter 5 | Honey, They Shrunk My Paycheck
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