Payroll Deduction

We all know that what an employee earns is not what they bring home. The primary reason for this difference lies in the number of payroll deductions taken from an employee’s wages. In this article, let’s find out about payroll deductions and why you must know about them. 

What are payroll deductions? 

Payroll deductions refer to the amounts that are taken from an employee’s paycheck every pay period. There are several types of deductions that can be classified as being mandatory or involuntary. Payroll deductions are used for different purposes such as payment for taxes, benefits, and garnishments. Furthermore, payroll deductions can also be pre-tax or post-tax. 

What are mandatory payroll deductions? 

When we say mandatory payroll deductions, these are the types of deductions that employers are required to withhold by law. Failure to pay for these payroll deductions can result in penalties. What are these?

• Federal income tax. This is deducted from the wages of all U.S. workers unless otherwise exempt due to low income. Federal income tax applies to salaries, cash gifts, gambling income, gifts, bonuses, and unemployment benefits. Federal income taxes are used to fund public services. 
• State and local income taxes. Like federal income tax, these are also used for public services. These depend on the state’s income tax structure and on the state where the employee receives their income regardless of where the employer’s office headquarters are located. 
• Social Security and Medicare. Collectively called FICA taxes, these taxes are based on the employee’s income. For Social Security, employers must contribute 6.2% of each employee’s wages. The employee pays 6.2% into Social Security as well. For Medicare, both employer and employee each pay 1.45% of wages.
• Garnishments. These are ordered by a court and are used to pay for overdue debts including delinquent child support payments, unpaid federal or state taxes, alimony, and defaulted student loans. 

What are voluntary payroll deductions? 

When we say voluntary payroll deductions, this means that employees give consent and choose to have these amounts deducted from their paycheck. The following are common examples of voluntary payroll deductions:

• Health insurance premiums
• Retirement plans
• Life and disability payments
• Flexible spending account (FSA) or health savings account (HSA)