Despite being known as the state no one is able to spell, Massachusetts has a lot more to its name than misplaced letters. It's a bustling region with plenty of business opportunities, especially in the technology, finance, and healthcare sectors.
But while the Bay State may have a great economy, employers must follow certain laws when it comes to pay and deductions. This includes understanding the meaning and implications of post-tax deductions, which are increasingly becoming a standard in many workplaces.
This article will explain what post-tax deductions are, why they exist, and how they compare to other types of payroll tax, as well as outline what can and can't be deducted from an employee's paycheck in Massachusetts. Let's get started.
What Is a Post-Tax Deduction?
A post-tax deduction is a sum of money taken out of an employee’s paycheck after taxes have already been withheld. The amount deducted may vary depending on the type of deductions being taken or the employer's policy. Post-tax deductions are often used to cover a variety of expenses such as health care costs, retirement contributions, union dues, and other miscellaneous costs.
The characteristic that distinguishes post-tax deductions from other types of deductions is that they are taken after mandatory taxes have already been withheld. This means that the money deducted does not reduce an employee’s taxable income and, therefore, will not lower their overall tax bill.
Why Post-Tax Deductions Exist
Post-tax deductions exist to help employers provide employees with additional supplementary benefits and services that are not covered by traditional pay packages. For example, an employer may use post-tax deductions to cover health insurance premiums or retirement contributions for their workers. Staff benefit from having cost-effective access to services and products that they may not otherwise be able to afford.
It is important to note that post-tax deductions are not always optional for employees. In some cases, an employer may require employees to pay certain costs using post-tax deductions, such as union dues or union service fees. In these situations, employees must be made aware of the deduction before they agree to take the job in order to understand exactly what the structure of their pay package will be. The golden rule is that all post-tax deductions must be agreed to in writing and in line with applicable municipal, state, and US federal labor laws. Massachusetts has a few specific rules on post-tax deductions, which we'll cover later on.
Massachusetts Tax Withholding Requirements
The average Massachusetts worker takes home about 70 to 80 percent of their gross pay before post-tax deductions are made. That's because employers in MA are required by law to withhold taxes from their employees' wages.
Both the state and federal governments want a share of what workers earn for public welfare programs and to fund vital services like education, law enforcement, transportation infrastructure, and more.
The amount an individual contributes per paycheck can vary depending on several factors, as some mandatory deductions work on a sliding scale. We've compiled them all below along with details about how they're applied to employee earnings.
Federal Income Tax Withholding
Arguably the most inescapable form of payroll tax, federal income tax is a requirement of almost all working US citizens. It is automatically deducted by employers to be paid directly to the Internal Revenue Service (IRS) at the end of the year. All employees are asked to submit their W-4 form when hired so employers know how much income tax should be withheld from each paycheck.
Federal income taxes depend on things like filing status, number of dependents, and total income. In 2023, the brackets for individuals are as follows:
- 10% on earnings between $0 and $11,600
- 12% on earnings between $11,601 and $47,150
- 22% on earnings between $47,151 and $100,525
- 24% on earnings between $100,526 and $191,950
- 32% on earnings between $191,951 and $243,725
- 35% on earnings between $243,726 and $609,350
- 37% on earnings of $609,351 or more
Federal Insurance Contributions Act (FICA)
The Federal Insurance Contributions Act (FICA) was passed by Congress in 1935 under President Franklin D. Roosevelt. It is a federal law provisioning taxation of both employers and employees to fund critical public programs such as Social Security and Medicare.
The amount of money that is taken out from an individual's paycheck for FICA depends on their taxable income; payments are split by separate rates for the two aforementioned programs, and there are sometimes limits to what can be taken out.
Read on for an overview of where Social Security and Medicare FICA payment expectations stand as of 2023.
Social Security
Social Security is one of the most important sources of income for many people in retirement. It can provide a steady, reliable stream of income to cover basic expenses such as food, housing, and medical care.
Social Security is administered by the Social Security Administration (SSA). The SSA determines eligibility and payments based on an individual's work history, earnings, age, disability status, and other factors.
Individuals become 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 earnings and the number of years they have worked.
Social Security is mainly funded through working citizens' paycheck taxes. The federal government requires employers to deduct a flat rate of 6.2% from their employees' paychecks and match it, for a total of 12.4%, up to a limit of $168,600 per year. This money is deposited into a Social Security Trust Fund, which is used to cover current benefits and future programs.
Medicare Taxes
America's private healthcare system isn't easy on seniors. Many of them have to either pay out of pocket for their medical care or rely on Medicare; the government-funded health insurance program for Americans over 65 and some disabled individuals.
Medicare provides basic coverage that can help offset the costs of hospital visits, doctor's appointments, and prescription drugs. Medicare taxes withheld through FICA income taxes fund this program, only at a lower rate of 1.45% per worker. Employers must match these contributions and bump up an individual's rate by 0.9% when they earn more than $200,000 per year.
Massachusetts State Income Tax
Most American states use a progressive system for state income taxes, where the more someone earns, the higher the percentage of tax they pay will be. Massachusetts state taxes are different, as it uses a flat rate for local income tax for a majority of its residents. All individuals who make over $8,000 must pay a 5% personal income tax rate on their entire salary, in addition to wages, tips, and commissions.
On a ballot measure in 2022, Massachusetts residents approved a new additional 4% tax for individuals who earn a yearly taxable income of $1 million or more. The 'Millionaire’s Tax', as it's called, was first imposed in 2023 by the Massachusetts Department of Revenue (DOR) and will be adjusted to account for changes in the state's cost of living over the coming years.
Depending on the individuals' annual combined tax liability, they may be eligible for a Massachusetts income tax return. As such, these rates are just estimated taxes, although the employer will typically withhold state income taxes according to these brackets.
Paid Family Medical Leave (PFML) Tax
In January 2021, Massachusetts joined an exclusive club of American states that offer their residents Paid Family Medical Leave, or PFML. Every jurisdiction has different rules, but Massachusetts is among the most generous, provisioning as much as 26 weeks of paid leave to qualifying workers. This time off can be taken to deal with a range of personal and familial responsibilities, including the birth of a child or caring for an ill relative. Maternity leave is generally grouped into the same category as PFML.
The cost of PFML is split between workers and employers. Workers are currently expected to contribute 0.208% of their annual earnings to the program up to the Social Security taxable maximum of $160,200.
What Payroll Taxes Do Employers Pay In Massachusetts?
Employers are responsible for withholding taxes mentioned above from their employee taxes. However, once the Massachusetts income tax withheld is calculated, they are still responsible for Massachusetts payroll taxes.
These contributions come directly from employers' pockets to fund the state's various programs and services. See an explanation of each one below.
FICA Payments
Federal Insurance Contributions Act (FICA) payments are equally footed between employees and employers. Each party contributes a set portion of a worker's yearly pay, only the companies' share isn't deducted from payroll. It's matched at the end of the year when the employer files their taxes. In 2023, employers pay a flat rate of 6.2% of each employee's yearly wages up to $168,600 per year to support Social Security and an additional 1.45% per year with no upper limit.
Unemployment Insurance (UI) Tax
Most states have Unemployment Insurance (UI) to support workers who are laid off or between jobs. These critical programs provide temporary income protection, training, and job search help for the unemployed. Because UI is intended to assist people who are out of work due to no fault of their own, employers are the only ones who pay UI taxes.
In Massachusetts, businesses qualify to contribute to the Unemployment Insurance fund when they meet the following criteria:
- Employ staff working at least one day within 13 weeks of a calendar year.
- Pay employees a wage of $1,500 or more per calendar year.
Things get a bit confusing from there, as rates can differ between industries. The high-risk construction sector is expected to pay 5.55% of staff earnings to UI, while employers in other industries only pay 1.45%.
Unemployment Insurance tax rates can further change based on how long an employer has done business in the State of Massachusetts. Those who are new generally pay more than those who have been in operation for at least four years, which is the threshold to receive an experience-based rate.
Overall, UI tax rates in Massachusetts can range anywhere between 0.56% and 18.55%.
Paid Family Medical Leave (PFML) Tax
Massachusetts' Paid Family Medical Leave program relies on contributions from employers and employees alike. Businesses are required to pay a payroll tax rate of 0.312% per staff member per year. There are exceptions of course; companies with preexisting benefits and insurance plans that equal or exceed MA PFML usually don't have to contribute. Employer PFML tax is also only applicable to organizations with over 25 individuals on staff.
Lawful Post-Tax Deductions In Massachusetts
Massachusetts Judicial Supreme Court decision Camara v. Attorney General (2011) established a statewide precedent for what employers can and can't deduct from their employees' wages. In this specific case, which was between a waste disposal company and its staff, justices ruled management overstepped its jurisdiction by imposing $21,488 worth of penalties on employees for motor vehicle accidents. While damage set-offs are sometimes permissible, this specific employer had failed to objectively determine drivers' liability before deducting wages. They ultimately lost and the decision has been used to inform state statutory wage laws.
Under a provision of the Massachusetts Wage Act, Mass. Gen. Laws c. 149, § 148, wage payments to employees must be made in a prompt and full manner. Section 150 of the Wage Act allows for deductions in certain cases, like when a worker consents, or when deductions are made in accordance with a written agreement that is part of the employee's contract. In every scenario, the decision must be made without objection.
So, what does a valid deduction, or set-off look like? Here are a few examples:
Retirement Plan Contributions
Retirement plan contributions are one of the more common post-tax deductions. Employers can deduct a certain amount from an employee's paycheck for retirement savings, such as 401(k) or IRA contributions. The employer may also offer matching funds to encourage employees to save more for retirement. This is a great way to help employees plan for the future and ensure they have enough income in their later years.
Union Dues
Employers that have collective bargaining agreements with unions may deduct union dues from employee paychecks to cover the cost of lobbying and other organizational activities. The amount of the deduction is agreed upon between the employer and union and may be taken out of employees' paychecks on a monthly or annual basis.
Health Insurance Premiums
Health insurance premiums cover common job benefits like medical care, prescription drugs, dental care, and vision care. Employers can deduct a certain amount from an employee's paycheck to cover the cost of their health insurance premiums or opt to pay it entirely.
Judicial Wage Attachments
In some cases, an employee may have a court-ordered wage attachment. This could be due to certain debts or child support payments that must be paid directly from their paycheck. These deductions are often set up by the creditor and will continue until the debt or obligation is paid off.
Consider Using an Employer of Record Platform
That ends our review of payroll deductions in the State of Massachusetts. Hopefully, this article has helped you to better understand the law and how it impacts your business in terms of post-tax deductions.
Remember, employers must always abide by state and federal law when it comes to payroll deductions. If you're hiring somewhere new, an Employer of Record (EOR) platform like Borderless can help you quickly and effectively hire the best talent while abiding by local regulations.
Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
