Even though Massachusetts is known as a state that no one can spell, it has a lot more names than misplaced letters. It's a bustling area with plenty of business opportunities, especially in the technology, finance, and healthcare sectors.
However, while the Bay State may have a good economy, employers must follow certain laws when it comes to wages and deductions. This includes understanding the meaning and implications of after-tax deductions, which are increasingly becoming the standard in many workplaces.
This article will explain what after-tax deductions are, why they exist, and how they compare to other types of payroll taxes, as well as outline what can and cannot be deducted from an employee's paycheck in Massachusetts. Let's get started.
An after-tax deduction is a sum of money that is deducted from an employee's paycheck after taxes are withheld. The amount of deductions may vary depending on the type of deduction or the employer's policy. After-tax deductions are often used to cover a variety of expenses, such as health care expenses, pensions, union dues, and other miscellaneous expenses.
After-tax deductions are different from other types of deductions in that they are taken after the mandatory tax has already been withheld. This means that the money deducted will not reduce the employee's taxable income and therefore their overall tax bill.
The after-tax deduction exists to help employers provide employees with additional supplemental benefits and services that aren't covered by traditional compensation packages. For example, employers can use after-tax deductions to pay their workers' health insurance premiums or retirement benefits. Employees benefit from cost-effective access to services and products they may not be able to afford.
It's important to note that after-tax deductions aren't always optional for employees. In some cases, employers may require employees to use after-tax deductions to pay for certain expenses, such as union dues or union service fees. In these cases, employees must be aware of the deduction before agreeing to accept the job in order to get an accurate idea of their compensation structure. **The rule is that all after-tax deductions must be agreed to in writing and in accordance with applicable municipal, state, and U.S. federal labor laws. Massachusetts has some specific regulations regarding after-tax deductions, which we'll cover later.
Workers in Massachusetts take home on average, about 70 to 80 percent of their gross wages before after-tax deductions. This is because employers in Massachusetts are required by law to withhold taxes from employees' paychecks.
Both the state and the federal government want a share of workers' earnings to go to public welfare programs and fund vital services such as education, law enforcement, transportation infrastructure, and more.
The amount of an individual's contribution per paycheck can vary depending on a number of factors, as some mandatory deductions are calculated on a pro-rata basis. We've put together them below along with details on how to apply them to employee earnings.
The federal income tax is arguably the most unavoidable form of payroll tax and is a requirement for almost all working U.S. citizens. It is automatically deducted by the employer and paid directly to the Internal Revenue Service (IRS) at the end of the year. All employees are required to file their W-4** when they are hired so that employers know how much income tax should be withheld from each paycheck.
Federal income tax depends on factors such as filing status, number of dependents, and gross income. In 2023, the parentheses for individuals are as follows:
10% of income between $0 and $11,600
12% of income between $11,601 and $47,150
22% of income between $47,151 and $100,525
24% of income between $100,526 and $191,950
Revenue between $191,951 and $243,725 is 32%.
35% of income between $243,726 and $609,350
37% with revenue of $609,351 or more
The Federal Insurance Contributions Act (FICA) was passed by Congress in 1935 under the leadership of Franklin D. Roosevelt**. It is a federal law that provides for taxes on employers and employees to fund key public programs such as Social Security and Medicare.
The amount taken out of an individual's paycheck depends on their taxable income; Payments for the two plans are split between separate rates, and there is sometimes a limit to the amount that can be withdrawn.
Read on to find out what Social Security and Medicare FICA's payments can expect as of 2023.
Social Security is one of the most important incomes for many retirees**. It can provide a stable, reliable income** to cover basic expenses such as food, housing, and healthcare.
Social Security is administered by the Social Security Administration (SSA). SSAs determine eligibility and payments based on an individual's employment history, income, age, disability status, and other factors.
Individuals are eligible for Social Security benefits at age 62, although disability benefits may be available at an earlier age. The amount of social security benefits received depends on a person's lifetime income and the number of years they have worked.
Social Security is financed primarily from payroll taxes for working citizens. Federal** requires employers to deduct 6A flat rate of 2% and matching it for a total of 124% with a maximum limit of $168,600 per year. The money is deposited in a Social Security Trust** to pay for current benefits and future plans.
The private healthcare system in the United States is not easy for seniors. Many of them either have to pay for medical bills out of pocket or rely on health insurance; **Funded health insurance plans for Americans over the age of 65 and some people with disabilities.
Medicare offers basic insurance that can help offset the cost of hospital visits, doctor's appointments, and prescription medications. The program is funded by Medicare taxes withheld through the FICA's income tax at a rate of only $1 per workerLower tax rate of 45%. Employers must match these contributions and earn more than 0Increase the rate for individuals by 9% at $200,000.
Most states in the United States have a progressive system for state income tax, and the more a person earns, the higher the percentage of taxes they pay. The state tax rules in Massachusetts are different because it uses a flat rate of local income tax for most residents. All individuals earning more than $8,000 must pay a 5% personal income tax rate on their entire salary, in addition to wages, tips, and commissions.
In a 2022 ballot measure, Massachusetts residents approved a new additional tax of 4% on individuals with annual taxable income of $1 million or more. The so-called "millionaire tax" was first levied by the Massachusetts Department of Revenue (DOR) in 2023 and will adjust for changes in the state's cost of living in future years.
Depending on an individual's annual consolidated tax liability, they may be eligible for a Massachusetts income tax return. As a result, these rates are only estimated taxes, although employers typically withhold state income taxes based on these brackets.
In January 2021, Massachusetts joined an exclusive club in various states of the United States that provides Paid Family Medical Leave (PFML) to its residents. Each jurisdiction has different regulations, but Massachusetts is one of the most generous, offering up to 26 weeks of paid leave to eligible workers. This time can be used to deal with a range of personal and family responsibilities, including the birth of a child or caring for a sick relative. Maternity leave is usually placed in the same category as PFML.
The cost of PFML is shared between the worker and the employer. Currently, workers are expected to contribute 0. of their annual earnings to the program208% up to a Social Security taxable cap of $160,200.
Employers are responsible for withholding said taxes from their employee taxes. However, once the income tax withheld in Massachusetts is calculated, they are still responsible for payroll taxes in Massachusetts.
These donations come directly from employers' pockets and are used to fund a variety of programs and services in the state. See each of the instructions below.
Federal Insurance Contributions Act (FICA) payments are equal between employees and employers. Each party contributes a certain portion of the worker's annual salary, and only the company's share is not deducted from the payroll. It is matched at the end of the year the employer files the tax. In 2023, employers pay a flat rate of $6 per employee's annual salary2% up to $168,600 per year to support Social Security with an additional 145% with no upper limit.
Most states have unemployment insurance (UI) to support workers who have been laid off or lost their jobs. These key programs provide temporary income protection, training, and job-seeking assistance to the unemployed. Since UI is designed to help people who have lost their jobs through no fault of their own, employers are the only ones paying UI taxes.
In Massachusetts, businesses are eligible to contribute to unemployment insurance** when they meet the following criteria:
Employees are hired to work at least one day in a 13-week calendar year.
Employees are paid $1,500 or more per calendar year.
From there, things get a bit confusing as rates can vary from industry to industry. The high-risk construction industry is expected to pay UI 555%, while employers in other industries only pay 145%。
Unemployment insurance rates may change further depending on how long the employer has been doing business in Massachusetts. Those who are new to the process typically pay more than those who have been in operation for at least four years, which is the threshold to get experience-based rates.
Overall, the UI tax rate in Massachusetts is at 056% to 1855% between.
Massachusetts' Paid Family Medical Leave program relies on employer and employee contributions. Businesses must pay $0 per employee per year312% payroll tax rate. There are, of course, exceptions; Companies with pre-existing benefits and insurance plans equal to or greater than the MA PFML typically do not have to contribute. Employer PFML tax also applies only to organizations with more than 25 employees.
The Massachusetts Supreme Court's decision in Kamala v. Attorney General (2011) sets a statewide precedent for what employers can and cannot deduct from an employee's paycheck. In this particular case, which was between a waste disposal company and its employees, the judge ruled that management exceeded its authority and imposed a fine worth $21,488 on the employee who was involved in a motor vehicle accident. While damages are sometimes allowed, that particular employer fails to objectively determine the driver's liability before deducting wages. They ultimately lost, and the decision has been used to inform state statutory wage laws.
Employees must be paid in full and in a timely manner in accordance with Section 149, Section 148 of the Massachusetts Payroll Code. Section 150 of the Wages Act allows deductions in certain circumstances, such as when the worker agrees, or when the deduction is made under a written agreement that is part of the employee's contract. In each case, the decision must be made without objection.
So, what does a valid deduction or set-off look like? Here are some examples:
Retirement plan contributions are one of the more common after-tax deductions. Employers can deduct a certain amount of retirement savings, such as 401(k) or IRA contributions, from an employee's paycheck. Employers can also provide matching** to encourage employees to save more for retirement. It's a great way to help employees plan for the future and ensure they earn enough in their later years.
Employers who have a collective bargaining agreement with a union can deduct union dues from employees' wages to cover the costs of lobbying and other organizing activities. The deduction is agreed upon by the employer and the union and can be deducted from the employee's salary on a monthly or annual basis.
Health insurance premiums cover common work benefits such as health care, prescription drugs, dental care, and vision care. Employers can deduct a certain amount from an employee's paycheck to cover their health insurance premiums, or they can choose to pay the full amount.
In some cases, employees may have a court-ordered garnishment of wages. This may be due to certain debts or child support having to be paid directly from their paycheck. These deductions are usually set by creditors and will continue until the debt or obligation is paid off.
This concludes our review of Massachusetts payroll deductions. Hopefully, this article has helped you better understand the law and how it affects your business when it comes to after-tax deductions.
Keep in mind that employers must always follow state and federal laws when it comes to payroll deductions. If you're hiring in a new location, an Employer of Record (EOR) platform can help you hire the best talent quickly and efficiently while complying with local regulations.