How do tax deductions work? How do PEOs help with it?

How do tax deductions work? Let’s start this article with the definition of tax deduction. In simple words we can say deduction of taxes reduces the amount of money you pay for taxes, and when we talk about deduction it’s just about a subtraction, which means the company is subtracting the amount  of your salary that’s taxable. 

How do tax deductions work? 

There are two ways when it comes to claim tax deductions: standard deductions and itemizing deductions. 

The standard deduction is kind of easy because it’s an automatic process, so using this one means the taxable income of employees is reduced by a set amount based on a couple of things: it depends if you’re single or married, because the current situation determines the amount of taxes the worker has to pay.

Itemized deductions are different, because it’s necessary to define them in a list, for example, including each deduction one by one. If you go with this option the person needs to fill out a form with the tax return and then later go through the records to back up the claims.

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How do PEOs help with tax deductions?

When your company works with a PEO the agreement indicates which employment taxes are going to be withheld, reported and paid, because the PEO is responsible on behalf of the client.

In the common agreement between a company and a PEO, this one takes over some or all  the duties of an employer, for instance, employment tax withholding, reporting, and payment functions as mentioned before, under its own name and employer identification number (EIN).

What expenses are tax deductible?

Here we mention some of them:

• Medical expenses

• Student loan interest

• Mortgage interest

• Retirement

• Home office deductions

Something important you need to know is that PEOs are a viable and reasonable payroll option to lower employer cost, and it’s fundamental to create a good relationship after selecting the right partner, because these decisions could have a real impact on your employees, maybe in professional or personal levels.

MidtownHR’s is focused on simple solutions for payroll and taxes, propose benefits that really feel like benefits, keep up with employment law and also help protect your team, ¡Let’s talk!