How to Calculate Payroll Deductions with Pre-Tax Items

Whereas larger businesses may hire payroll clerks who work full-time to compute employees' earnings and tax withholdings and some small businesses hire payroll services to handle those duties, many start-ups depend upon their owners to perform payroll accounting duties. This process may be simple at first, paying part-time employees hourly or salary earnings and withholding the amount prescribed by the Internal Revenue Service. Still, calculating payroll deductions when employees require pretax deductions, such as contributions to retirement accounts or qualified medical plans, can be a little more troublesome, particularly when business owners aren't familiar with the payroll deduction process.


Collect a form W-4 from every employee at hiring, as the IRS requires. This document provides you with information on how much withholding you need to take from each worker's paycheck, using tables created by the IRS.


Calculate the worker's gross earnings using your payment method, be it multiplying an hourly rate -- and an overtime rate, if applicable -- by time worked, a salary for exempt employees or by piecework rates. Gross earnings are the amount the worker would receive if he was completely exempt from taxes.


Determine Social Security and Medicare withholding using the employee's gross earnings. Most pretax deductions apply only to income taxes, and workers must pay these FICA taxes on all earnings. The 2011 withholding rates are 1.45 percent for Medicare taxes and 4.2 percent for Social Security taxes. Calculate employer FICA contributions -- 1.45 and 6.2 percent, respectively -- using gross earnings as well. As with employee FICA taxes, withholding requirements and pretax deductions don't affect employer contributions. Depending on your medical plan, you may not need to make matching FICA contributions on pretax medical plan deductions.


Apply pretax deductions to the employee's gross earnings, reducing the paycheck amount to its post-deduction earnings level. Ensure each pretax deduction qualifies under IRS guidelines for pretax deductions.


Withhold the appropriate amount of income tax from the post-deduction earnings, using the number of exemptions the employee claimed on her W-4 and withholding tables the IRS issues to employers in Circular E. The amount remaining is the employee's net pay. If any post-tax deductions, such as garnishments, are required, reduce the check by this amount. Cut the employee a check for that amount, noting all withholding on her check stub.