Most businesses offer some form of medical and related insurance to their employees. This can include medical, dental, vision, short-term disability, long-term disability, life, and supplemental life insurance coverage. An employer may pay for all of this expense, a portion of it, or merely make it available to employees, who must foot the entire bill. It is rare for an employer to pay for all of this expense, since insurance is very expensive; consequently, there will usually be a deduction from employee's pay to cover some portion of the cost.

The type of deduction calculation used is typically employer reimbursement of a relatively high percentage of the medical insurance for an employee and a lesser percentage for that person's portion of the insurance that covers his or her family members. For example, the employer might pay for 80 percent of an employee's medical insurance and 50 percent of the portion of additional coverage that applies to the employee's family. Additional types of insurance, such as vision or life insurance, are less commonly paid by employers; more commonly, employees are given the option to purchase and fully pay for them.

When the payroll department sets up deductions for the various types of insurance, it is better to itemize each one separately on the employee paycheck remittance advice, so there is no question about the amount of each deduction being withheld for each type of insurance. This approach makes it easier for employees to judge whether they want to continue to pay for various types of insurance; it also makes it easier for the payroll staff to calculate and track deduction levels.

Example. The Doughboy Donut Company pays for 90 percent of its employees' medical insurance, 25 percent of the additional medical insurance for the families of employees, and 90 percent of employee life insurance. It also makes short- and long-term disability and dental insurance available to its employees, who must pay in full for these benefits. Emily Swankart is a single parent who has subscribed to all of these types of insurance. Here's how the total amount of deductions for her would be calculated:

As is commonly the case under this type of deduction plan, note that the largest portion of the expense to be paid by the employee is the medical insurance for the dependent.