What are payroll deductions?
Payroll Deductions are anything that is taken from an employee's pay, whether it's pre-tax or post-tax (other than payroll taxes themselves). OnPay offers pre-built, customizable deduction templates that you can use to add employee deductions to your payroll.
This is accomplished in two steps:
- Set up the deduction for your company's payroll
- Assign the deduction to applicable employees
Viewing existing payroll deductions
Go to Payroll>Set up, then Worker Deductions.
Deductions that have already been set up are listed on the left. Select from this list to see information about each deduction. Don't see the deduction you need? That's okay! Next we'll cover how to add a new payroll deduction.
Adding new payroll deductions
To add a new payroll deduction, click +Add.
Give this deduction a name that represents the purpose of the deduction clearly. This name will appear in the list of payroll deductions.
Next, choose a deduction type from the list. Depending on the deduction type you select, you may have an option to add an employer matching contribution.
Employer contributions
Many deductions allow an employer match, which calculates company contributions toward employee benefit plans based on rules you set. There are two ways you can contribute toward your employees retirement savings account:
- Employer matches
- Nonelective contributions
Employer matches are directly tied to employee deferral amounts. This means you only contribute toward an employees plan if they elect to defer a percentage of their pay toward the plan as well.
Nonelective contributions are a way to contribute toward eligible employees' plan, even if they don't pay into the plan.
Employer matches
The "deferral" is the pay employees have elected to contribute toward the plan. You can choose to set up a partial match, or a full match. You can also set up a tiered match.
Example
Your employee contributes 5% of their pay toward a 401(k) plan. When they earn $100, $5 is deferred toward the plan. If you match 100% of contributions, up to 5%, an additional $5 is contributed by the company toward the employee plan.
Tiered match example
We'll use the same 5% example as above, where an employee contributes 5% of their pay, and earns $100.
- If you match (A) 100% of the employee contribution...
- Up to (B) 2%...
- Then match (C) 50% of the employee contribution...
- Up to (D) 5%...
...then an employee who earns $100 would contribute $5 toward their plan, and the company would match that by $2 (100% match up to 2% of $100) + $1.50 (50% match up to 5%), for a total match of $3.50.
Deductions that allow employer match:
- 401K Retirement
- 403B Retirement
- 457 Retirement
- Roth 401K Retirement
- Roth 403B Retirement
- Health Savings Account
- Simple IRA Retirement
Nonelective contributions
Nonelective contributions are a way to pay into every employee retirement savings plan, even those who don't opt-in themselves. By default, the percent you enter will be included in the deferral amounts, but you can also report it as Safe Harbor, or exclude it from the deferral amounts.
Once you've set up your deduction, click Create.
You should now see your new payroll deduction in the list on the left.
Deduction types available in OnPay
When adding a new payroll deduction, the options found under "Select Type" allow for you to associate your payroll deduction with a deduction recognized by your local and federal tax offices.
Common deduction types:
- Standard deduction - An after-tax deduction.
- 401(k) Retirement - Pre-taxed Retirement deduction, reduces federal and state taxable wages by the amount of contribution.
- 403(b) Retirement - Retirement account for certain employees of Public Schools & tax exempt organizations or not-for-profit organizations. This is a pre-taxed Retirement deduction reduces federal and state taxable wages by the amount of contribution.
- 457 Retirement - Pre-taxed Retirement deduction, reduces federal and state taxable wages by the amount of contribution. Offered by state & local government & some nonprofits.
- Roth 401(k) Retirement - Post-taxed Retirement deduction.
- Roth 403(b) Retirement - Post-taxed Retirement deduction.
- FSA - Pre-taxed Flexible Spending Account deduction, commonly used for medical expenses.
- HSA Health Savings - Pre-taxed deduction, funds roll over and accumulate year to year if not spent.
- Simple IRA Retirement - Taxed Retirement deduction, reduces federal and state taxable wages by the amount of contribution.
- Roth 457 Retirement - Retirement plan that some state, local government, and nonprofit employers provide for their workers.
- Dependent Care FSA - A pre-tax benefit account used to pay for eligible dependent care services, such as child or adult daycare, preschool, before-school and after-school programs, or summer day camp.
- Union Dues - A flat amount deducted from each check to pay dues owed by Union members.
- Union Dues by Hours - A flexible amount deducted from each check based on hours worked.
- Section 125 - Pre-taxed deduction that reduces taxable income.
- Section 132 -Pre-taxed deduction for transportation reimbursement costs.
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What is a Roth IRA?
A Roth IRA is an Individual Retirement Account that, much like a Roth 401(k), is funded with after-tax dollars and enjoys tax-free growth and withdrawals. These accounts can be established individually, or, due to recent state-mandated retirement funds, by the employer, if they are required to so do in their state.
How is a Roth IRA different than a traditional Roth 401(k)?
Beginning in 2023, individuals with a Roth IRA can contribute up to $6,500 per year (up from $6,000), as well as an additional $1000 per year if they are over 50. The contributions are funded with after-tax dollars and there is no company match.
A normal Roth 401k is through a company that has a plan administrator. The deductions are also after-tax contributions but the maximum contribution limit is higher. For 2023, the limit is $22,500, with a $1,000 catch-up contribution limit for participants age 50 or older. The catchup limit applies from the start of the year to those turning 50 at any time during the year.
How are these funded?
The amounts are deducted from employee pay as normal, but it is up to the client to fund the accounts through the state-mandated website or the individual’s personal retirement company.
Why is this important?
Most state-mandated retirement plans are Roth IRAs. As more and more states pass legislation to create these plans each year, Roth IRA deductions will become increasingly common across the country.
Roth IRA Setup Guidelines
Roth IRA deductions can be set up and added to employees in OnPay just like any other deduction, using the instructions found both above and below. We do recommend the following settings, however:
- When setting up the "Roth IRA" deduction at the company level, use the "Standard Deduction (Post Tax)" deduction type.
- When adding the deduction to an employee, be sure to enter $6,500 in the "Annual Limit" field (or $7,500 for anyone over 50 years old).
Adding deductions to employees
Once created, a deduction can be used for any employee. You have complete control over who has which deduction, as well as some employee-specific customizations that you may need to do.
In the Workers tab, click an employee's name to view their profile.
Click Payroll Deductions. (Or go to Job>Deductions)
To add your new payroll deduction, click the blue add (+) button, then select the deduction from the menu. You then can enter either a flat amount, or a percent of gross wages.
When viewing employee deductions in an employee profile, you can click the menu (three dots in the upper-right corner) to see how the deduction applies company-wide (Payroll>Set up>Worker Deductions). You can also remove the deduction from the employee using this menu.
Click the caret in the upper-right corner to make employee-specific overrides and settings.
Deduction overrides and settings
The menu options available will depend on the deduction you're viewing. Here are two examples:
Example 1: 401(k) deduction override and settings
For deductions like a 401(k) retirement savings plan, you can make the deduction active/inactive, and set an employee-specific rate. You also can override the company-wide deduction settings by entering a flat amount. If this employee wishes to use a different bank account for this benefit, you can enter this banking information here.
Example 2: Section 125 plan
For deductions like Section 125 plans, you'll need to enter the amount and limits for each employee here. You can also override this benefit with a flat amount.
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