A payroll deduction is money that gets taken out of an employee’s paycheck. That’s the simple explanation, anyway. Some payroll deductions are pre-tax, which means they’re taken out before any taxes are withheld from your paycheck.
Others are post-tax deductions which—you guessed it—means they’re deducted after taxes have been subtracted.
So what are the most common payroll deductions? Why are some pre-tax and others aren’t? Which ones should you use at your company? And how much time do you need to spend worrying about deductions when you run payroll?
We’ll cover everything you need to know about payroll deductions so you never have to stress about them again.
Popular Payroll Deductions
If you were to glance over pay stubs from several different companies, you might notice that they have a few deductions in common. Some are necessary, like tax withholding deductions. If we really want to dig into the semantics here, there’s actually a difference between withholdings and deductions.
Withholdings are required by state, federal, and local governments. You and your employees can’t opt out of these. They include things like income tax and Social Security contributions.
Deductions are everything else. For simplicity’s sake, we’re going to refer to everything as a deduction.
Many deductions aren’t strictly necessary, like retirement benefits. But tons of employers include them as part of a benefits package.
Here’s a quick rundown of the most common payroll deductions.
- Federal Income Tax: All employers must withhold federal income taxes from their employees’ paychecks. The amount an employer withholds depends on the employee’s tax bracket, filing status, and deductions. Employees will give you all the information you need when they submit their Form W-4, Employee’s Withholding Certificate, when you hire them.
- Federal Insurance Contributions Act (FICA) Taxes: Employers and employees alike must pay into Social Security and Medicare. Employers deduct 6.2% for Social Security and 1.45% for Medicare from each employee’s gross (pre-tax) wages. All employers must then match these amounts before remitting the total FICA taxes to the federal government.
- State Income Tax: Most states levy their own income tax, and rates vary wildly. States with income tax generally have their own version of a Form W-4, which employees fill out and submit to employers.
- Union Dues: Unions provide working professionals with the leverage to fight for fair wages, job security, affordable health care, and safe workplaces. In some states, employers and unions can enter into union-security agreements that require members to pay dues. Federal and state laws regulate how much unions can charge, but it’s usually around 1-2% of an employee’s gross (aka, pre-tax) wages.
- 401(K) Contributions: Many employers sponsor 401(K) retirement plans for their employees. Usually, both employers and employees contribute to a 401(K). For employers, the contributions are tax deductible up to a yearly limit. Employee contributions are made with pre-tax wages, which lowers their overall taxable income.
- Insurance Policies: Along with retirement, health insurance is a common benefit for employers to offer. Employers typically pay a minimum percentage of the health insurance premiums, leaving the rest for employees to cover. And this usually comes out in the form of a payroll deduction. Other types of insurance deductions include those for vision, dental, and life insurance policies.
- Charitable Contributions: An employee can request that money be deducted from each paycheck to go toward a specific cause.
- Court-Ordered Garnishments or Liens: These deductions can only be taken out from an employee’s paycheck with an official court order or notice from the IRS. One super common reason for wage garnishment is child support payments. As for tax liens, they’re often imposed when an employee fails to pay off tax debt.
Some employers deduct the cost of things like uniforms and tools from their employees’ paychecks. But the US Department of Labor frowns on the practice, and if your employees are covered under the Fair Labor Standards Act, it might even be illegal.
So that’s why we haven’t included these types of expenses as popular deductions. Because they shouldn’t be.
How to Check Your Payroll Deductions as an Employee
If you’re an employee, it’s important to check on your payroll deductions each time you receive a pay stub. Taxes are usually under a section called Employee Taxes Withheld. You’ll find other deductions under Employee Deductions.
Of course, pay stubs can be formatted differently, but you should be able to see a line-by-line list of all your payroll deductions. A good pay stub will also show the employer’s contributions to these items—like the employer part of Social Security and Medicare taxes or a 401(K) match if your employer offers it.
If you’re not sure where to find your deductions or have questions about your pay stub, reach out to your manager or your HR department. They should be able to help you clear it all up.
How to Automate Payroll Deductions For Your Business
Okay, so if you’re an employer, you now know just about every type of payroll deduction you must take from an employee’s paycheck. You also know all the different deductions your employees can partake in as part of your benefits package.
But how do you make sure that all the right amounts are taken every single paycheck, for every single employee?
And then how do you put that information on a pay stub so your employees can easily find it?
Here’s what you shouldn’t do: calculate payroll deductions manually.
Don’t do it. Just don’t.
A business owner faces major liability if they mess it up. Even a tiny mistake in calculation can invite a massive lawsuit. And lawsuits over wage theft happen a lot more than you think.
Do you think you’re one of those people who works great with an Excel spreadsheet and makes minimal mistakes?
Maybe you are. But why risk it? It’s extremely easy to mess up when you do this stuff on your own. The calculations can get very complicated. Even if you figure it all out, rates and rules for payroll deductions are constantly changing.
To keep up, you’ll need to juggle the federal tax code, state tax code, local tax code, and benefits rules and policies. You’ll need to do this for every location where one of your employees lives and works.
That sounds like an admin nightmare to me. Luckily, there’s an easy solution. Get payroll software, pay them whatever they want, and get this problem out of your life.
All you’ll have to do is set up your employees. The software will guide you through the state stuff that you need to register for. Then, you get to run payroll in a snap and the software handles all the complicated stuff for you almost automatically.
We use payroll software and even if they raised the price by 10 times, I’d still pay it. Don’t tell them I said that. But it’s true.
That’s how valuable payroll software is. We feel terrible for everyone who had to take care of payroll deductions before computers were a thing.
What a nightmare. We’re glad we don’t have to experience it—and neither do you.