Permanent and variable/temporary deductions can be two-tiered in nature. Some examples include pension, such as being at a particular percentage until the employee reaches a threshold, then being at a different percentage thereafter. 

This article will explain how to set up a two-tiered deduction. 

Creating a Two-Tiered Deduction Payroll Category

1. Go to Payroll > Payroll Setup > Payroll Categories. 

2. Click the "+ New" button to create a new payroll category. 

3. Select the 'Permanent Deduction' classification. 
   

4. Enter the required fields, such as "Code" and "Name". 

5. Enter the additional fields as required.

6. On the right-side of the setup page, identify which taxes this deduction payroll category should deduct before.

7. On the right-side of the setup page, navigate to the 'Formula' tab. This is where you will set up your tiers. 
   

8. Activate the "Formula" and enter the formula as required. For example, if the deduction is calculated based on gross earnings, you'll want to enter all earning payroll categories that apply, in a mathematical expression, such as "('101 - Salary' + '102 - Hourly Wages')". It's important to include the addition ("+") between payroll categories. 
   

9. Click "Apply two tiered calculation" at the bottom of the Formula Area to set up your tiers. A pop-up window will appear. 
   

10. In the dropdown field, select 'Two-Tier'.
    

11. For "Use", select the correct option for proration. A case study is provided below for the differences in proration.
    

12. Click "+ Add" to add a new tier. 

13. In the "From" field, enter the minimum for an employee's year-to-date values before this tier will apply. In the "To" field, enter the maximum for an employee's year-to-date values that this tier will apply. In the "%" field, enter the percentage that will apply for this tier. 

14. Click the "Save" button to save your changes. Repeat steps 12 through 14 for each tier. 
    

15. Click the save button to save your changes. When saving the payroll category, the system will ask you if you want to add it to all employees. 

Tip: Remember to assign the new payroll category to the applicable employees and add values as required! You will also want to ensure that you enable it in the first step of the payroll wizard (Select Pay Period) when processing your next pay run. By default, new payroll categories are inactive in this step. 

Example

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The above example is a two-tiered deduction. The deduction is calculated on '101 - Salary' and '102 - Hourly Wages' payroll categories. When an employee's year-to-date (YTD) amount for 101+102 is from 0 to $71,299.99, then this payroll category will deduct 10.4%. When an employee's YTD amount for 101+102 reaches $71,300, then this payroll category will deduct 12%. 

Case Study: Proration

For all scenarios below, assume: 

• The formula is 100% of all earnings (gross) 

• The percentage for the lower tier is 2% 

• The percentage for the higher tier is 4.8%

• Pay frequency is monthly (12 pay periods)

• The employee's gross pay on their January record is $4,000. 

If prorated: 

Assume the threshold is $40,000. The threshold for January for this employee would be $3,333.33 (annual threshold / employee pay frequency). 

• 2% of $3,333.33 = $66.67

• 4.8% of $666.67 = $32.00

This means $98.67 would be deducted from the employee. 

If not prorated: 

Assume the threshold is $800. 

• 2% of $4,000 = $80.00 

This means $80.00 would be deducted from the employee.