Explanation of Deductions

Throughout this guide you’ve come across numerous mentions of the various deductions that are taken out of your paycheck. Here is a closer examination of these deductions so that employees can understand what’s being taken of their paychecks and what employers are responsible for withholding.

  • Federal Tax. This is the federal tax taken out of each paycheck. The percentage depends on how much you make annually and your marital status. So if you’re single and make between $36,901 to $89,350 then 25% of your check goes to the federal tax.
  • State Tax. This is the amount taken out by the state you reside in. Tax Foundation is a useful resource to learn the tax rates in your state or locality.
  • FICA. The Federal Insurance Contributions Act requires all employers to withhold taxes from employee earnings fund Social Security and Medicare programs. Employers also pay an equal amount that are withhold. If you’re self-employed, you’re responsible for Self-Employed Contributions Act (SECA) taxes. Keep in mind that Social Security taxes change yearly and are currently at 6.2%. Medicare is 1.45%.
  • Unemployment. The Federal Unemployment Act (FUTA) was established to compensate employees who lose their jobs. The FUTA rate is at 6.0%. There is also the State Unemployment Tax Act (SUTA). You can view this directory to find the SUTA rate in your state.
  • Health. Many employees will have their health insurance taken out of their gross amount either pre-tax or post-tax. Most employers offer their employees health insurance.
  • Life. Employers may offer their employees life insurance. This is usually a small amount that is taken out about twice a year.
  • Retirement. You may also have a percentage of your paycheck taken out for retirement. You can select this amount and where to contribute, such as a 401(k), or your employer may automatically deduct a certain amount.
  • FSA. A Flexible Spending Account is a special account where you place money for out-of-pocket medical costs. You do not have to pay taxes on this money.
  • ESOP. Employee Stock Option Plan is a benefit that some organizations provide. This is where a percentage of a paycheck is deducted and used to purchase company stock.
  • Misc. Some organizations may deduct from a paycheck for uniforms, meals, equipment, training, or union dues.

There could be other deductions depending on what other benefits are offered. Keep in mind though that no matter how much is withheld from a paycheck you need to know the difference between gross pay and net pay.

Gross pay is the amount of the paycheck before taxes have been taken out. If you are an hourly employee, then your gross pay would be the hours that worked multiplied by the amount of money you made per hour. If you make $10 per hour and worked twenty hours, then your gross pay would $200. If you are paid by salary, your gross pay would be your annual salary divided by the number of paychecks that you receive in a year. For example, if your salary is $65,000 and you receive 26 paychecks a year, your gross pay would be approximately $2,500 per month.

Net pay is the amount of money left over after all of the deductions mentioned above have been taken out.

Handling Payroll When You Can’t Pay Employees

What happens if you’re a business owner who can not pay your employees when payday arrives? Here a couple of options that you may want to consider if this ever happens to you so that you can still manage to compensate your hard working team members.

  • Be Upfront. Not being able to make payroll can be extremely embarrassing. But, it’s only fair that you inform your employees in advance. Giving them a couple of weeks to figure out their financial situation or look for another job is better than letting them know on payday.
  • Find The Money. If you can’t make payroll, then you need to find ways to come up with the funds immediately. You could borrow money from friends, family, or take a out a loan. You may have to max out your credit cards or suspend your own salary. You could turn to SBA loans, sale/leaseback, or even crowdsourcing to finance the money needed to pay employees.
  • Use Your Resources. What if a client owes you $30,000? Contact the client and say that you’ll wipe the debt if they can pay you half of that today. While that will hurt your overhead, you can at least cover payroll. You may have pending invoices, equipment to sell, space to lease, or even offer discounts on your inventory to raise additional funds quickly in order to make payroll.
  • Do Not Stagger. It is against the law to only pay employees a fraction of their paychecks. Instead, forgo your own salary or ask the higher paid employees to miss a payday in order to pay lower paid employees.
  • Delay Payroll. Wait five to seven days after pay period so that you have more time to raise payroll funds.
  • You Still Have to Pay Employees Who Make Tips. If you’re an industry where tips are the norm, such as a restaurant or bar, you may be able to ask employees to wait a couple of days before cashing their paycheck or see if they can wait another week for a check. Most employees live paycheck to paycheck, but because they are making tips, they may be willing to help you out. This doesn’t give you permission not to pay them. You’re still responsible by law to pay tipped employees.
  • Restructure Your Business. Once you’ve been able to figure out payroll, you need to have a hard look at your business model and determine how you can cut your overhead so this doesn’t happen again.
  • Collect Outstanding Invoices. Invoicing should be a priority for your business and you should never let an invoice become past due. If an invoice is past due, follow-up with the client and remind them that the invoice is past due. You could even offer a discount if paid within a week. If all else fails, you may have to take the client to court to hand it over to a collection agency.

Ultimately you need to increase your business’s cash flow, unless you’re completely shutting the business down. Here are some recommended ways to get that cash flowing again so that you can handle payroll again.

  • Payroll Factoring. Payroll factoring is where you sell your accounts receivable to a bank or lending agent in exchange for a cash advance that will then be used to pay your employees. The advantage is that you can quickly obtain money for payroll, but the lending company will only give you a percentage of the amount that you were owed on your invoices.
  • Negotiate With Suppliers. Ask if your suppliers will provide a discount if you pay your bill early. Even a 1% discount can add up quickly.
  • Cut Back on the Inventory. Only focus on inventory that will sell quickly. Unsold inventory is a drain on your business.
  • Expand Your Market. Are there new markets, either geographically or demographically, that your business can enter? Are there new products or services that you can offer? Look for new market opportunities to help your business grow.

Even if you are honest about your financial problems and your employees are understanding and willing to work with you, you are still required by law to pay them. Whatever direction you go into in order to pay your employees, make sure that it’s not prohibited in your state. But, if you run into this problem, move quickly to fix it. It will not go away by wishing, waiting, or ignoring the problem. Swift, decisive action – and luck – is the quickest way to fix a problem like this.

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