Payroll Deductions

Mandatory deductions

Employers must withhold these whether the employee wants them or not:

• Federal income tax, based on the employee's Form W-4.
• [FICA](/glossary/fica/): 6.2% Social Security up to the annual wage base and 1.45% Medicare, plus 0.9% Additional Medicare Tax on wages above $200,000 in a year.
• State and local income tax where it applies. Nine states have no tax on wage income, and some cities and counties add their own.
• State employee-paid programs: a few states require employee contributions to unemployment insurance (Alaska, New Jersey and Pennsylvania) and several to paid family and medical leave or disability programs.

Employer-paid taxes like FUTA and most state unemployment insurance are not deductions; the employer pays them on top of gross pay.

Pre-tax deductions

Pre-tax deductions come out before some or all taxes are calculated, so they lower the employee's tax bill. The main ones:

• Medical, dental and vision premiums paid through a Section 125 cafeteria plan: exempt from federal income tax and FICA, and in most states from state income tax.
• Health FSA, dependent care FSA and HSA contributions through a cafeteria plan: same treatment.
• Traditional 401(k) and 403(b) deferrals: exempt from federal income tax but still subject to FICA.
• Qualified commuter benefits, within IRS monthly limits.

Getting the tax treatment right matters. If payroll codes a 401(k) deferral as exempt from FICA, both the employee and employer underpay Social Security and Medicare, and the error shows up when someone reconciles Forms 941 and W-2.

Post-tax and voluntary deductions

Post-tax deductions come out after taxes and do not change taxable wages: Roth 401(k) contributions, union dues, charitable payroll giving, some life and disability insurance, purchase programs and repayment of pay advances. These are voluntary, which means the employee authorizes them. Get the authorization in writing, signed and dated, and keep it. Many states require written authorization for any deduction that is not required by law, and some (for example California and New York) limit which purposes are allowed at all.

Order of deductions

Payroll systems apply deductions in a set sequence, and the sequence changes the result:

1. Start with gross pay.
2. Subtract pre-tax deductions, each against the taxes it is exempt from.
3. Calculate and withhold taxes.
4. Calculate disposable earnings for any garnishment, then apply child support orders first, followed by other orders by priority and date received.
5. Subtract other post-tax voluntary deductions.

Wage garnishments use their own definition of disposable earnings under federal law, which subtracts only legally required deductions, not voluntary ones like health premiums. Treating those the same is a common calculation error.

Legal limits on deductions

Under the Fair Labor Standards Act, deductions for items mainly for the employer's benefit, such as uniforms, tools, cash register shortages or damaged equipment, cannot reduce a non-exempt employee's pay below minimum wage or cut into overtime owed. Many states go further and ban those deductions outright or require specific written consent. For exempt employees, deductions from salary are allowed only in narrow cases (for example, full-day absences for personal reasons), and improper deductions can cost the exemption. Handle final pay deductions carefully: several states restrict what can come out of a final paycheck. Rules vary by state.

Tips for HR and payroll teams

Explain deductions in the onboarding packet with a sample paystub. New hourly employees often expect gross pay and are surprised by the first check, which feeds early attrition and calls to HR. Audit deduction codes every year at open enrollment, test one sample employee in each state you pay in, and reconcile benefit carrier invoices to payroll deductions monthly so employees are not paying for coverage they dropped.