Payroll Deduction

What Is a Payroll Deduction?

Payroll deductions are wages withheld from an employee’s paycheck for the payment of taxes, benefits, or garnishments. There are both mandatory and voluntary payroll deductions. The order in which deductions are taken out of paychecks also matters because some are made pre-tax and some are made post-tax. 

Which Payroll Deductions Are Mandatory?

Employers are required by law to withhold the following payroll deductions before issuing an employee’s paycheck:

Federal Income Tax

Federal income tax is applicable to salaries, cash gifts from employers, tips, gambling income, bonuses, and unemployment benefits, and is deducted from all U.S. workers’ wages (unless you qualify for an exemption due to low income). 

State and Local Income Tax

State and local income taxes depend on the state in which an employee receives their income—not the state in which the employer is headquartered. The following states do not have income tax payroll deductions as of 2020: 

• Alaska

• Florida

• Nevada

• South Dakota

• Texas

• Washington

• Wyoming. 

New Hampshire and Tennessee do not tax wages but do tax investment income and interest.

State Unemployment Insurance

State unemployment insurance only applies to those receiving wages in Alaska, New Jersey, and Pennsylvania. 

Court-Ordered Garnishments and Payment to Creditors

These may be required to pay off overdue debts, including:

• Delinquent child support payments

• Unpaid federal or state taxes

• Defaulted student loans

• Alimony

• Various other monetary fines.

Social Security and Medicare

These contributions are assessed as a percentage of your income. Social security is 6.2 percent of earnings, and Medicare is 1.45 percent.

Which Payroll Deductions are Voluntary?

The law doesn’t require employers to take voluntary payroll deductions, but many choose to, as they are often helpful for employees or the employer. Voluntary payroll deductions may include:

• Health, life, and disability insurance payments

• Union dues

• Retirement or 401(k) contributions (Roth 401(k) contributions are pre-tax)

• Flexible spending account (pre-tax) or health savings account contributions