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.

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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 2024:

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

In some cases, a person’s earnings must be withheld by their employer. Importantly, employers may not terminate their employees for garnishment. Garnishments and other court-ordered payments may include:

Social Security and Medicare

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

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:

https://www.bamboohr.com/blog/wage-garnishment
https://www.bamboohr.com/blog/payroll-taxes-guide
https://www.bamboohr.com/blog/who-pays-for-unemployment
https://www.bamboohr.com/blog/payroll-mistakes-how-to-avoid