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What Are Payroll Deductions?

Key Takeaways

1. International companies looking to expand globally need know all required payroll obligations to any new employee in their country of residence. This can be a complicated process requiring deeper knowledge of the target countries tax and labor laws.

2. Payroll deductions can be categorised as a pre-tax deduction or a post-tax deduction. A pre-tax deduction is deducted from total monthly or weekly salary. A post-tax deduction is deducted after employee income tax has been withheld. 

3. There are many types payroll deductions, some obligatory and others added at the employer’s discretion. Types include varying taxes, compulsory contributions, wage garnishments, student loan repayments, child support arrangements and health and pension insurance premiums. Each country has rules as to how any number of these need to be organised as payroll deductions.

4. A Global PEO can support your company by taking over international payroll when hiring internationally. This means they will take care of all required payroll deductions and employment matters related with your new foreign employee.

Whether a business hires locally or seeks to expand their team into a different country, matters of payroll can be complicated. Payroll deductions can be mandated by law or voluntarily organized as special arrangements between employer and employee. Payroll deductions are deducted off an employee’s gross salary to pay varying taxes, contributions, or court-ordered payments. It is important that all parties involved understand how each payroll deduction fits within any given salary package. This article will go through varying payroll deductions that you may encounter when hiring talent internationally.  

What are payroll deductions?

Payroll deductions are amounts that employers withhold from an employee’s total compensation at each pay period to pay off or contribute to compulsory and voluntary arrangements. In many cases, payroll deductions can lower the overall taxes owed by the employee. Some arrangements even allow employees to save money easily without the extra personal effort. Sometimes, employees can collaborate with their employer to organize different deduction strategies to best suit their overall personal circumstances and provide them the most in terms of long-or short-term benefit

It is important for prospecting applicants to understand the relevant deductions will affect their take home salary, in other words, understanding the difference between gross and net pay.

Difference between gross pay and net pay

Gross pay is the total salary amount before any payroll deductions are taken off. This is generally the salary amount posted on job adverts. Gross pay is a term commonly used when hiring independent contractors as they are usually responsible for taking off the relevant deductions as an employer would for their employee. Bonus payments are included when working out gross pay, but can have different tax rates associated with this form of added payment.

Net pay is the amount an employee actually takes home and receives into their bank account after all relevant taxes and deductions are taken out.

What do payroll deductions include?

Employers can include different arrangements as part of an overall salary package to entice prospecting job applicants to join their teams. It is also important for employers looking to hire employees in other countries to recognize that different countries have different policies for what is considered compulsory or voluntary payroll deductions. Voluntary payroll deductions can also be outside a country’s designated statutory benefits scheme and up to an employer’s discretion.

All relevant payroll deductions should be outlined on each employee payslip or pay stub. This can help an employee keep check on how much they are paying in taxes and towards any contributions, and make sure employers are upholding their obligations to relevant labor and tax laws.  

Here are some distinct terms and types of payroll deductions you might see pop up between different countries.

Pre-tax vs post-tax deductions

Just like gross and net pay, pre-tax and post-tax deductions are distinguishable amounts based on an employee’s overall salary.

Pre-tax deductions are contributions that an employee does not have to pay tax on as part of their income. This means in many circumstances that they will receive more of their salary upfront and have to pay more tax when accessing the benefits that are contributed towards in the future. An employer will take off and withhold any pre-tax deductions that are relevant to each employee, and then whatever salary is left is considered taxable income.

Post-tax deductions are contributions that are taken off after any relevant taxes have been withheld. In comparison to pre-tax deductions, post-tax deductions are included in the total taxable income. 

Taxes

Each country has their own rules when it comes to payroll and employment taxes. However, not all types of employment taxes are included in payroll taxes and vice versa.  Nonetheless, taxes collected can go towards funding a variety of public goods and services such as universal healthcare, national security and defence, roads, infrastructure, transport and social security as examples. Both the company and employees are obligated to pay taxes.

Tax types and rates that employers are obligated to withhold as part of an employee’s salary package can vary at the country, state and local province level. It is imperative that international businesses that hire foreign employees, even on a remote basis, comply with the specific tax obligations and legal requirements relevant to the country of hire. It should also be noted that the term payroll tax can mean different things in each country, and may not have anything to do with employee taxes, but obligations of the employer specifically.

Compulsory contributions

Each country with committed labour laws will have outlined compulsory contributions that the employer, the employee, or both must pay. In most cases, these contributions are not considered “tax” per se, but sometimes can be included as part of payroll tax deductions. Types of compulsory contributions can include:

  • Public and private pension contributions
  • Health insurance
  • Social security or welfare services
  • Sick-pay contributions

For example, in the United States, the Federal Insurance Contributions Act (FICA) is a type of payroll tax that is deducted from an employee’s salary, in turn accruing credits for social security and Medicare benefits.

In Australia, it is mandatory for employers to contribute a percentage of an employee’s salary to a personal superannuation (pension) fund. Employers can seek a tax deduction on this amount as part of their companies’ earnings each tax year. Independent contractors or sole traders are obligated to contribute a percentage of their gross pay to their own personal superannuation fund also. Super rates and taxes differ between earnings and types of income.

Wage garnishments

In some circumstances, a court can order that a portion of an employee’s salary is to be legally withheld by an employer to pay another party. Payments can be towards child support, unpaid taxes, credit-card debts, or other types of miscellaneous debts and fees.

Child support

Sometimes an employee will ask to voluntarily contribute more of their salary towards child support or ask to contribute before being court ordered.

Student loan repayments

Student loans are loans taken out to complete higher or tertiary education courses. These loans can be provided and covered in part or in full through a dedicated governmental run education scheme or available through a private entity. In some cases, students may need to pay back their loans as part of their salary once their gross salary goes over a certain threshold in the undetermined future. It is also possible for employees to sacrifice more of their salary or make voluntarily repayments outside any dedicated payback scheme.

Health insurance and pension premiums  

Sometimes employers can offer their employees added benefits in the form of health insurance or pension premiums. These premiums are different and on top of any mandated health or pension insurance requirements. Employees can also make special arrangements with their employer to put extra money towards a higher premium of their choice.

Horizons Can Manage Payroll Deductions for your Global Team 

If your company is looking to hire new talent internationally but is having trouble figuring out what your payroll obligations are in any given country, this is exactly where Horizons can help. Horizons is a leading Global PEO that can support businesses internationally by administering payroll internationally, including looking after all the necessary payroll deductions. 

This means your company will have a compliant payroll under any given countries labor and tax laws, while fulfilling your obligations to your new employee.  

Frequently Asked Questions (FAQ)

Typical payroll deductions include income taxes, compulsory contributions, voluntary or concessional contributions, wage garnishments, or any other agreed upon discretionary amount that is withheld by an employer for an employee’s benefit or to make a court or government ordered payments. 

The total amount be withheld can be calculated by deducting the applicable payroll deductions from the gross net pay of any one employee. The percentage rate of taxes and any compulsory contributions required to be withheld by an employer varies at a country, state and local level.  Salary ranges can also introduce different thresholds.

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