What Are Common Payroll Deductions?

Did you know you can set up voluntary withholdings for things like childcare? Learn more about common payroll deductions.

It can be disappointing to receive a paycheck that’s less than expected. However, deductions and withholdings can have long-term benefits for your finances, health, and family. To help you understand where your hard-earned money may be going each month, we’re reviewing common payroll deductions and their purpose.

How To Understand Payroll Deductions

Payroll deductions are the wages employers withhold from their employees’ total earnings. They go toward various purposes, including paying taxes and wage garnishments. These deductions make up the difference between gross pay and net pay.

Here are some of the most common payroll deductions:

• Income tax
• Social Security tax
• Wage garnishments
• 401(k) contributions
• Child support payments

Some payroll deductions, like taxes and wage garnishments, are mandatory. Employers can be liable for missing amounts if they fail to withhold these deductions accurately. Conversely, some payroll deductions are voluntary. These deductions will only be withheld if an employee provides written authorization.

Companies usually process payroll deductions every pay period based on tax laws and employees’ withholding information. Deductions depend on various factors, including state and local withholding certificates and each individual’s Form W-4 Employee’s Withholding Certificate. Place of business and location of services are other considerations.

What Are The Basic Payroll Withholdings?

Employers are obligated to withhold mandatory payroll deductions without their employees’ authorization. These mandatory deductions typically include all payroll taxes. Employers submit them to the government on behalf of their employees, ensuring timely tax payments and avoiding costly penalties. Here are some examples of mandatory payroll deductions:

Federal Income Tax

Employees must fill out a Form W-4 to indicate the amount they want to withhold for federal taxes. This decision directly impacts their take-home pay. Choosing a higher amount means a lower take-home pay, but it might give you a tax refund at the end of the year. Alternatively, a lower amount means heftier paychecks but could lead to owing more when your taxes are due.

Employers calculate the amount their employees owe to the federal government as a percentage of their income. They also consider other factors like taxable income, number of claimed allowances, and marital status.

State Income Tax

State income tax goes to your state’s government, and the percentage varies by state. Usually, employees follow the state income tax laws of the state where they work. However, employee income tax might be withheld in their state of residence instead of the state where they work if they work across state lines.

Employers calculate employees’ state income taxes based on W-4 forms, taxable income, number of allowances, and marital status. Like federal income tax, employers don’t contribute to the owed amount. Employers might not have to deduct income taxes for employees with low wages or various personal exemptions. Additionally, there are a few states that don’t levy state income tax, including Texas.

Social Security Tax

According to the Federal Insurance Contributions Act (FICA), employers must withhold contributions from employees’ paychecks. These deductions add to disability and retirement funds and family and survivor benefits. The amount an employee must pay depends on their taxable income. By law, employers must withhold 6.2% from the first $168,600 each employee earns annually. Amounts beyond that aren’t subject to Social Security income deductions.

Medicare Tax

Medicare tax is another mandatory deduction, usually appearing as FICA on payrolls. It goes toward nursing and hospital care, doctors’ fees for people 65 and older, and Social Security disability benefits. The federal law requires employers withhold 1.45% of annual wages regardless of how small or large an employee’s salary is. There’s a 0.9% surtax for employees earning more than $200,000.

Wage Garnishments

Employers might have to withhold wage garnishments from a paycheck under IRS directions or a court order. The funds will cover unpaid debts, taxes, or child support.

What Are Optional Deductions?

Optional deductions are voluntary. Employers can’t withhold them unless they have a signed authorization from an employee. Here are some of the most common optional deductions:

Health Insurance Deductions

Employees can participate in their employer’s health, vision, or dental plans. If they do, they’ll see insurance policy deductions on their payroll as payment.

Employees can also contribute to a Health Savings Account (HSA). What’s the difference between HSA vs. copay? Both provide helpful insurance benefits. However, copay plans have lower deductibles and higher monthly premiums. Meanwhile, HSAs are used when a health insurance plan has a higher deductible with lower premiums. An HSA allows you to put money away and use it for future approved medical expenses.

Aside from HSAs, employees can also contribute to a Flexible Spending Account (FSA). Contributions to either are tax-deductible, reducing the amount of owed taxes. Withdrawals are also tax-free if they’re for qualified medical expenses. While they have many similarities, there are some critical differences to note.

With HSAs, your money carries over year after year, helping you build savings for medical expenses in the future. Unfortunately, you lose unused FSA funds by the start of the new year. In addition, you can invest your HSA funds, which isn’t an option with FSAs.

Retirement Deductions

You can also contribute to 401(k) and 403(b) employer-sponsored retirement plans, depending on who your employer is. Employees can make pre-tax or after-tax contributions to enjoy tax benefits now or in the future. For 401(k) accounts, employees choose how much to contribute and how to invest the money. 403(b) accounts are similar but are usually offered by non-profit organizations and public-sector employers.

Life Insurance & Disability Plan Deductions

Employers might offer group life plans or short- and long-term disability plans. Employees who participate in these plans will see deductions from their pay to cover the policy costs.

Other Voluntary Payments

Other voluntary payments include auto and pet insurance policies, wellness programs, educational assistance, dependent care FSAs, charitable giving, and payroll deduction loans.

What Payroll Deductions Are Not Taxable?

Employers apply pre-tax deductions to employees’ payrolls before calculating and withholding taxes. Pre-tax deductions are advantageous to employees. Examples of employee benefits include lower taxable income, reduced taxes owed, and higher take-home pay.

The most common pre-tax deductions include the following:

• Healthcare premiums
• 401(k) contributions
• Health Savings Accounts (HSA)
• Flexible Spending Accounts (FSA)
• Dependent Care Assistance Programs (DCAP)

Certain pre-tax deductions might have eligibility requirements. For example, you must have a qualified dependent to contribute to a DCAP. Meanwhile, your age affects how much you can contribute to your 401(k) account.

Employers must know which deductions to apply before taxes to prevent under or overcharging employees on taxes. Federal laws limit pre-tax deductions to ensure high-income employees don’t have an unfair advantage and that funds are used for correct intentions. Pre-tax deductions might have additional limits or rules, depending on the plan design.

If there are pre-tax deductions, there are also after-tax deductions. Employers first withhold all pre-tax deductions and then use the remaining amount to cover after-tax payments.

The most common after-tax deductions include the following:

• Wage garnishments
• Charitable giving
• Life insurance or disability plans
• Union dues

Set Up Direct Deposit With A+ Federal Credit Union

Payroll deductions can be tricky. Spare yourself the headache by setting up direct deposit with A+ Federal Credit Union to then be able to set up various optional payroll deductions with your account. That way, you don’t have to bother with manual transfers every month. You can also automatically transfer money to your savings account and be on your way to reaching your financial goals and living your A+ life.

With A+FCU direct deposit, you can receive payments straight to your account without having to cash a check or visit a branch. In addition, you can get your payments up to two days early.* This means you can take care of bills and other financial responsibilities sooner and avoid hefty penalties.

Setting up direct deposit with A+FCU is a breeze – log in to A+ Mobile App or A+ Online Banking and connect your savings or checking account to your employer’s payroll system online. You can then start enjoying effortless payroll deductions.

*Early payment of funds is not guaranteed and is subject to when A+FCU receives the funds from the originator.

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