What Is a Payroll Deduction?

Payroll deductions are amounts that are taken out of an employee’s income to meet certain obligations such as taxes, benefits, or garnishments. These deductions can either be mandatory or voluntary. It is important to note that the sequence in which these deductions are executed matters because some are taken pre-tax and others post-tax.

Mandatory Payroll Deductions

Employers are required by law to withhold certain payroll deductions which include the following:

  • Federal Income Tax: This applies to earnings such as salaries, tips, bonuses, unemployment benefits, gambling income, and cash gifts from the employer. Federal income tax is deducted from the wages of all United States (U.S.) workers, except for those who qualify for an exemption because of low income.
  • State and Local Income Tax: The state where an employee receives their income determines their state and local income tax deductions, and not the state where their employer is headquartered. Some states do not have state income tax payroll deductions as of 2020. For instance, New Hampshire and Tennessee do not tax wages but tax investment income and interest.
  • Social Security and Medicare: These are contributions that are made as a percentage of the employee’s income. Social Security amounts to 6.2 percent of earnings while Medicare is 1.45 percent.
  • Court-Ordered Garnishments and Payment to Creditors: In cases of overdue debts, such garnishments may be required to pay creditors.
  • State Unemployment Insurance: This insurance only applies to wages earned in Alaska, New Jersey, and Pennsylvania.

Voluntary Payroll Deductions

While it is not mandatory for employers to take voluntary payroll deductions, they may choose to do so either for the benefit of employees or the employer. Some

Examples of voluntary payroll deductions include the following:

  • 401(k) Retirement Plans: These are voluntary deductions that help employees save for their retirement.
  • Health Insurance Premiums: Employees may choose to make voluntary deductions to pay for their health insurance premiums.

In summary, payroll deductions are important deductions from an employee’s paycheck used to meet certain obligations. They can either be mandatory or voluntary, and employers are required by law to withhold some of these deductions.