Peoplesoft /Deduction calculation

how are tax deductions calculated

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Question

During pay calculation, how are the deductions calculated.

From Peoplebooks, I understood that

1) The deductions are first calculated based on the gross earnings.

2) The taxable gross income is calculated. Before tax deductions are subtracted from the gross earnings to arrive at the taxable gross earnings.

3) Taxes are calculated based on the taxable gross income.

4) All the taxes, deductions are then arranged in sequential order based on priority and the total withholding is calculated.

5) Gross earnings minus the withholdings provide you the net pay.

But on further researching, I found a different explanation.

1) The deductions are first calculated based on the gross earnings.

2) The taxable gross income is calculated. Before tax deductions are subtracted from the gross earnings to arrive at that.

3) Taxes are calculated based on the taxable gross income to give you after tax earnings

4) After tax deductions are then subtracted from the after tax earnings to give you the net pay.

Which of the above two scenarios really happens while calculation?

When there is insufficient pay, I have understood that the deductions happen based on the

deduction priority.

Answer

These two explanations are a bit vague at step 4. Also the step 5 is really not clear at all -- unless you understand the term withholding to mean all deductions -- taxes, garnishments, benefit contributions, voluntary deductions, and so on.

Once all of the proposed deductions (withholding) -- taxes and other deductions, are calculated; the Gross to Net calculation can occur. These deductions are subtracted from the available 'cash' gross pay until all are deducted or net pay goes to zero. The priorities apply in the case that net pay should go to zero. The priority is generally taxes, benefit deductions, garnishments, general deductions. The software allows you to manage the priorities among the benefit and general deductions. Also the garnishment rules provide for specified deductions to have higher priority than the garnishment.

Garnishments can greatly complicate the specific priorities since there may be rules which cause a garnishment to take priority over benefit deductions. If there is not enough cash earnings to deduct a pretax or tax deferred deduction -- e.g. Savings Plan, then the process will recalculate the taxes after removing that deduction from the set of deductions to be taken.

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Source: en.allexperts.com

Category: Taxes

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