Deduction Priority and Deduction Classification

The system uses the deduction priority number and deduction classification to determine the order in which it takes deductions in a pay calculation. Define deduction priority numbers on the Deduction Table - Setup page and deduction classifications on the Deduction Table - Tax Class page.

The deduction priority and deduction classification function in a pay calculation as follows:

  1. The system builds a temporary table that enables it to run calculations and store information.

    The system stores the deduction code, classification (before-tax, after-tax, or taxable benefit), priority number, and deduction amount in the table.

    For example, Mark receives 401(k), medical, dental, and life insurance benefits. He also contributes a portion of his earnings to union dues and a charity. The system interprets the information and stores it in a temporary table:

    Type Deduction Amount Classification Priority

    401(k)

    7%

    Before-tax

    5

    Medical

    100 USD (flat amount)

    Before-tax

    7

    Dental

    50 USD (flat amount)

    Before-tax

    8

    Life insurance

    100 USD (flat amount)

    Before-tax

    6

    Union dues

    2%

    After-tax

    9

    Charity

    25 USD (flat amount)

    After-tax

    10

  2. The system locates all deductions (not including taxes) and calculates their value.

    The system calculates the value of the deduction, based on gross earnings or a special accumulator.

    Note:

    Taxes are not included with deductions. Although taxes reduce gross pay, they are distinct in their categorization.

    Mark receives 2000 USD in gross earnings. The system calculates the deductions, based on the 2000 USD gross earnings:

    Type Deduction Amount Classification Priority

    401(k)

    7% × 2000 USD = 140 USD

    Before-tax

    5

    Medical

    100 USD

    Before-tax

    7

    Dental

    50 USD

    Before-tax

    8

    Life insurance

    100 USD

    Before-tax

    6

    Union dues

    2% × 2000 USD = 40 USD

    After-tax

    9

    Charity

    25 USD

    After-tax

    10

  3. The system calculates the employee's taxable gross income.

    To calculate an employee's taxable gross income, the system locates only those deductions with before-tax classifications and subtracts them from the gross income.

    Note:

    The system does not actually deduct anything from the employee's gross income; it only runs a calculation.

    Type Deduction Amount Classification Priority

    401(k)

    Subtract 140 USD

    Before-tax

    5

    Medical

    Subtract 100 USD

    Before-tax

    7

    Dental

    Subtract 50 USD

    Before-tax

    8

    Life insurance

    Subtract 100 USD

    Before-tax

    6

     

    Total deduction: 390 USD

     

     

    2000 USD (gross income) − 390 USD (total of all before-tax deductions) = 1610 USD (taxable gross income).

    Note:

    Seriously consider the deduction priority of before-tax deductions, because it affects the tax calculation.

  4. The system calculates taxes, based on the taxable gross income:

    Type Priority Deduction Amount

    Federal tax

    1

    31% × 1610 USD = 499.10 USD

    State tax

    2

    12% × 1610 USD = 193.20 USD

    Local tax

    3

    3% × 1610 USD = 48.30 USD

    Note:

    As you assign deduction priorities, remember that PeopleSoft assigned priorities for federal, state or provincial, and local taxes on payroll tax tables. These taxes have a higher priority to ensure that taxes take precedence over other deductions.

    See Application Fundamentals: (USA) Setting Up the Company Local Tax TableApplication Fundamentals: (CAN) Setting Up the Canadian Company Tax Table

  5. The system withholds taxes, before-tax deductions, and after-tax deductions from gross pay.

    The system calculates only the deductions. After the system completes these calculations, it withholds all of the deductions and taxes from an employee's gross pay in sequential order, using deduction priority numbers.

    The system withholds all of Mark's precalculated deductions and taxes from his 2000 USD gross pay as follows:

    Type Classification Priority Sequence Withholding Amount

    Federal tax

    NA

    1

    First

    499.10 USD

    State tax

    NA

    2

    Second

    193.20 USD

    Local tax

    NA

    3

    Third

    48.30 USD

    401(k)

    Before-tax

    4

    Fourth

    140 USD

    Life insurance

    Before-tax

    5

    Fifth

    100 USD

    Medical

    Before-tax

    6

    Sixth

    100 USD

    Dental

    Before-tax

    7

    Seventh

    50 USD

    Union dues

    After-tax

    8

    Eighth

    40 USD

    Charity

    After-tax

    9

    Ninth

    25 USD

     

     

     

     

    Total withholdings: 1195.60 USD

    2000 USD (gross income) − 1195.60 USD (total of all withholdings) = 804.40 USD (net pay).

    Note:

    At this point, the system takes deductions that have both a before-tax and after-tax classification in the following order: before-tax deduction, then after-tax deduction.

The final result is the employee's net pay.