What are different payroll deductions? Taxes, benefits, and more

Summary

• Employers are legally required to withhold portions of employee paychecks for federal income taxes and FICA contributions. Employers may also withhold amounts for voluntary deductions such as retirement plans and health insurance premiums when authorized by employees.
• Managing payroll deductions can be complex, involving intricate calculation rules, varying employee statuses and preferences, and ever-changing labor regulations.
• Workforce.com simplifies payroll by automating accurate calculations and ensuring the correct deductions are applied every time.

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Payroll deductions are withheld from an employee’s paycheck to cover taxes, garnishments, or benefits like health insurance. While federal and state taxes are statutory and legally mandated, options like retirement savings or supplemental insurance fall under voluntary deductions. Deductions are further classified as pre-tax or post-tax, depending on when they’re applied in the payroll process.In this guide, we’ll break down the types of payroll deductions, explain how they work, and share tips to ensure accuracy every pay period.

Mandatory vs. Voluntary Payroll Deductions

Payroll deductions are primarily mandatory or voluntary. As the name implies, mandatory deductions are amounts employees must pay and employers must withhold or deduct. This includes statutory deductions mandated by law, such as federal income taxes and Social Security. 

On the other hand, voluntary deductions are amounts taken out of an employee’s paycheck with their consent. These are typically for retirement accounts, health insurance, and charitable donations. 

Mandatory deductions

Statutory deductions

Statutory deductions are amounts that employers withhold from staff paychecks to meet tax obligations and fund essential public services like Social Security, Medicare, and state programs. 

Here are the statutory deductions that employers must withhold to comply with the law:

FICA taxes

FICA (Federal Insurance Contributions Act) taxes are a type of statutory deduction used to pay for Social Security and Medicare. 

Employees pay 6.2% of their salary toward Social Security tax. The contribution limit or cap on this amount is based on the wage an employee earns. For 2025, the wage base limit is $176,100.

Medicare tax is 1.45% of an employee’s pay and includes no cap. Employees who earn more than $200,000 could be subject to (based on their filing status) paying additional Medicare tax. More information can be found here on the Internal Revenue Service (IRS) website.

Federal income tax

Federal income tax is an amount deducted from every employee’s salary. The federal government sets different percentages to be paid as taxes on gross salaries based on a person’s income. The taxable brackets start at 10% and go up to 37% of someone’s gross pay.

Federal income tax is calculated progressively. That said, taxes on wages are not computed in its entirety by a certain percentage alone. It means that different portions of an individual’s income are taxed at increasing rates. For instance, a single individual has a taxable income of $65,000. That employee’s federal tax liability will be charged as follows according to 2025 rates:

• 10% on the first $11,925 = $1,192.50
• 12% on the next $36,550 ($48,475 – $11,925) = $4,386
• 22% on the remaining $16,625 ($65,000 – $48,475) = $3,635.50

Total Tax Liability: $9,214

State and local income taxes

Employers must also withhold state and local income taxes, depending on where their employees work or live. How these taxes are calculated varies. Some states follow a similar progressive model as the federal government, others impose a flat rate, and some states don’t impose income taxes at all. 

In addition to how state income taxes are calculated, you need to be aware of reciprocity agreements if an employee works in one state and lives in another. 

It’s important to note that while mandated by law, not all workers are subject to statutory deductions. For instance, independent contractors are not subject to Social Security or Medicare tax withholdings. If you need clarification on a worker’s classification, the IRS offers support through Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This form helps clarify whether a worker should be treated as an employee or an independent contractor.

Wage garnishments

Wage garnishments are payroll deductions based on a court order mandating an employer withhold a portion of an employee’s paycheck to pay for financial obligations or debt. Child support is a typical garnishment, but it can also be for other purposes, such as payments for student loans, tax debts, and court judgments for personal debts. The employer must calculate wage garnishments based on federal and state limits. As soon as the court order for garnishment is received, employers are obliged to apply the deduction and notify the employee.

Voluntary deductions

Unlike mandatory deductions, which fund government programs or fulfill obligations like child support payments, voluntary deductions are optional and enhance employee benefits. Common examples include: 

Retirement contributions

Employees can voluntarily set aside funds for their retirement. Popular options include 401(k) plans and Individual Retirement Accounts (IRAs), which employees can opt into if offered by the employer.

Health and welfare benefits

Employees can also opt to have health insurance premiums deducted from their paychecks for themselves and their dependents. Contributions to a health savings account (HSA) can also be taken with the worker’s consent.

Supplemental insurance coverage

Premiums for additional coverage, such as extended group life insurance, are voluntary. While employers may provide a base plan, employees can pay extra for added protection directly from their paycheck. 

Union dues

Union members can authorize their employers to deduct their union fees and dues from their paychecks. 

Savings and investment programs

Payments for employee stock purchase plans or amounts allocated for direct deposit to savings plans are a couple of examples of voluntary deductions geared toward employee savings and investment.  

Charitable donations

Employees can elect to have their donations to charity be deducted from their pay.

Voluntary deductions provide convenience to employees in managing their benefits and savings plans. However, employers must secure written authorization before processing these deductions to ensure compliance and transparency.

Download: Free Payroll Deduction Authorization Form

Pre-tax vs. Post-tax deductions

Payroll deductions are categorized as pre-tax or post-tax, depending on when they are taken from an employee’s earnings. 

Pre-tax deductions are withheld from an employee’s gross wages and can reduce the employee’s taxable income. However, they may still be subject to FICA taxes. Common examples of pre-tax deductions include HSA contributions, health insurance premiums, and 401(k) contributions.

Pre-tax deductions also reduce the amount a business owner has to pay toward federal unemployment tax (FUTA). FUTA is the system that provides compensation to people who have lost their jobs.

On the other hand, post-tax deductions are withheld from an employee’s net pay, meaning taxes have already been calculated and applied. While they don’t reduce taxable income, benefits or contributions made in this category often provide tax-free withdrawals or benefits in the future. Examples include Roth IRA contributions, charitable donations, and wage garnishments.

Stay on top of payroll deductions with Workforce.com

Managing payroll deductions is rife with complexities and challenges, from navigating regulations and unique state rules to managing employee updates, multiple voluntary benefits, and garnishments. Without the right tools, these tasks can quickly become time-consuming and prone to errors. That’s where Workforce.com steps in. 

Here are some of the ways Workforce.com can simplify payroll deductions. 

Onboarding

Accurate payroll starts with proper employee classification. Workforce.com has a strong onboarding system that ensures you have all the necessary information to classify employees correctly. It also handles necessary paperwork such as employee contracts and tax forms such as W-4. 

Centralized employee records

Workforce.com centralizes employee data within its payroll system, ensuring a single source of truth. Any updates to employee information, like changes to voluntary deductions, are instantly reflected across the platform, ensuring consistency. 

Time and attendance tracking

Accurate payroll depends on precise time tracking, especially for hourly employees.

Workforce.com’s time-tracking system ensures employees clock in and out correctly using mobile devices or kiosks. Missed punches trigger alerts, so issues are addressed immediately. The data flows directly into payroll processing, ensuring accurate timesheets and gross wage calculations.

Payroll

Workforce.com has a payroll system to calculate employee wages based on classifications, pay rates, timesheets, and corresponding deductions according to what’s mandated and what employees authorize you to withhold. All of these are automated and can be done in minutes.  

Recordkeeping

Workforce.com ensures that payroll records are kept safe and can be easily accessed in case of audits or employee inquiries. 

Managing payroll deductions is crucial not only for complying with tax laws but also for maintaining employee trust. Understanding the nuances of these deductions is vital to ensuring regulatory compliance, optimizing payroll processes, and supporting employee financial well-being.See Workforce.com in action and learn how it can improve your payroll processing and more. Book a demo today.