Statutory Deductions

What are statutory deductions?

Statutory deductions are mandatory taxes that employers withhold from employees’ gross earnings. These statutory employee deductions are typically used to fund various government benefits such as social security, unemployment insurance, Medicare, and pension plans.

The amount of statutory deductions will vary as they depend on an employee’s gross earnings. In a progressive tax system, like in the U.S., employees earning lower salaries contribute a lower percentage of deductions than those earning higher salaries. However, it is important to note there are fixed percentage rates for statutory contributions like Social Security and Medicare.

Types of statutory deductions

Here are some of the most common types of statutory deductions:

• Federal income tax: A progressive tax levied by the federal government on all forms of earnings that make up a taxpayer’s taxable income.
• Social Security and Medicare Taxes (FICA): Contributions towards the Federal Insurance Contributions Act (FICA), which fund Social Security and Medicare programs.
• State income tax: Tax imposed by many states on the income of its residents as well as nonresidents who earn income within the state.
• Local taxes: Taxes imposed by local jurisdictions like counties or cities. They can include property tax, sales tax, and sometimes income tax.
• Unemployment insurance: Mandatory insurance scheme that provides temporary income to individuals who lose their jobs.
• Worker’s compensation insurance: A form of insurance that offers medical benefits and wage replacement for employees injured while working.

Statutory deductions vs. payroll contributions

Although both statutory deductions and payroll contributions involve gross earning deductions, there are some distinctions that are useful to know:

How are statutory salary deductions calculated?

Here is an overview of how statutory salary deductions are calculated. However, it may vary depending on the country or region.

• Income tax: Income tax is usually calculated based on the employee’s gross salary and the tax rates applicable in the country or region. Tax rates often operate on a progressive scale, meaning the rate increases as the employee’s income increases.
• Social Security contributions: Typically, Social Security contributions have fixed rates. In the U.S., the current rate is 6.2 percent of earnings for both employers and employees. Currently, the taxable maximum is $168,600 (in 2024).
• Medicare or health insurance contributions: Often calculated at a fixed percentage rate or a fixed amount. In the U.S., the current Medicare tax rate is 1.45% for both employers and employees. Those earning a high income must pay an Additional Medicare Tax of 0.9%.
• Unemployment insurance contributions: The rate for unemployment insurance contributions varies by country and region. It is usually based on a percentage of gross earnings, and both employees’ and employers’ contributions are mandatory.
• Worker’s compensation insurance: The exact calculations for worker’s comp insurance depends on various factors, such as type of employees (salaried, self-employed, etc.), industry, payroll size, and previous history of claims.

Understanding HR’s role in statutory deductions

HR plays a significant role in ensuring that their organizations follow the strict guidelines and regulations for statutory deductions. Some key responsibilities include:

• Compliance with legal regulations: Staying updated on the relevant legal rules to ensure the company complies with all legal obligations regarding statutory deductions.
• Payroll management: Typically, HR is responsible for managing payroll, which includes calculating and processing statutory deductions accurately. It’s also critical to ensure timely payments to government agencies.
• Employee information management: Accurate records of employee information, including their tax filing status, dependents, and record of earnings, are essential for making accurate deductions. Keeping this information private and safe is just as critical.
• Transparent communication: Keeping employees up to date with any changes to statutory salary deductions. This often involves providing accessible online resources about statutory deductions, clear paystubs, and proactively answering questions or concerns.

FAQ

For informational purposes only: This HR Glossary entry is intended only for general information purposes and does not constitute professional advice. Always consult with a qualified professional for accurate, complete, and current information.