What Are These Payroll Deductions and Withholdings?

Payroll deductions and withholdings are wages withheld from an employee’s earnings to meet certain obligations, such as paying taxes and for benefits contributions. Several deductions and withholdings are required by law, whereas others are voluntary. Here’s a summary of some of the most common payroll deductions and withholdings.

Mandatory deductions and withholdings

Mandatory deductions and withholdings are those required by law and typically don’t require the employee’s consent. Here are some examples. 

Income tax withholding

Employers make withholdings each pay period for federal income tax. The amount is based on the individual’s pay, the applicable tax bracket, and the exemptions the individual claims on their Form W-4. In states and local jurisdictions with their own income tax, withholdings are made each pay period under the state’s or local jurisdiction’s formula for such taxes.

Federal Insurance Contributions Act (FICA)

FICA helps fund both the Social Security program and the Medicare program, which provide benefits for retirees, individuals with disabilities, and children. 

The withholding for Social Security is based on a percentage of an individual’s salary as determined by the federal government. 

Medicare withholdings are made each pay period as a contribution to Medicare and are based on a percentage of an individual’s salary as determined by the federal government.

State paid family leave programs

Some states have paid family leave programs that require employees to contribute. In such cases, deductions are made each payroll period based on a percentage set by the state. 

Garnishments

A wage garnishment is generally a court or agency order for an employer to withhold a certain amount of a worker's wages for the payment of a debt, such as child support.

The employer will typically receive a notice or order of garnishment that contains information about who is subject to the order, when to begin withholding, how much to withhold, and how and where to remit payments. The order may also require a response from the employer. The employer should give the employee a copy of the order and then begin withholding in accordance with it.

Federal law and many state laws have restrictions on how much of a worker's wages may be subject to wage garnishment(s). Where state law differs from federal law, the employer must generally observe the law resulting in the smaller garnishment.

Voluntary deductions

Employees may choose to have money taken out of their paycheck to cover the cost of various work-related items or benefits. These are known as voluntary deductions.

Under federal law and many state laws, employers are generally required to obtain an employee's consent before making many of these voluntary deductions. The agreement must specify the particular items for which deductions will be made and how the amount of the deduction will be determined. It is a best practice to obtain the employee's authorization in writing. 

Here are some examples of voluntary deductions.

Health insurance

Deductions can be used to pay health insurance premiums.

Supplemental life insurance

If employees want to add supplemental life insurance coverage, they typically deduct the premiums from their pay.

Retirement plans

Employees can make contributions to a 401(k) plan via payroll deductions.

Job-related expenses

The Fair Labor Standards Act (FLSA) and state laws govern the circumstances under which employers are permitted to make pay deductions for job-related expenses. Under the FLSA, these restrictions differ depending on whether the employee is classified as an exempt or non-exempt employee.

Non-Exempt employees

Generally, under the FLSA, the deduction must not reduce a non-exempt employee's pay below the minimum wage or cut into any overtime pay due, including deductions for:

• • Cash shortages;
  • Work tools used by the employee;
  • Employer-required uniforms;
  • Damages to company property by the employee or any other individual;
  • Financial losses due to clients/customers not paying bills; and
  • Theft of company property by employees or any other individual.

If a non-exempt employee works overtime, deductions are limited to the amount that could be deducted if the employee had only worked a 40-hour week.

IMPORTANT: State law may further limit or even prohibit certain deductions from employees' wages. For example, in California, if an employer requires that an employee wear a uniform, the employer must pay the full cost of the uniform. 

Exempt employees

Under the FLSA, employees who are classified as exempt from overtime must receive a set salary for each week in which they perform any work. Deductions from an exempt employee's salary are only permitted in the following limited circumstances:

• • When an employee is absent for one or more full days for personal reasons other than sickness or disability;
  • For one or more full-day absences due to sickness or disability, if the deduction is made according to a bona fide plan, policy, or practice of providing compensation for salary lost due to illness;
  • To offset jury or witness fees, or for temporary military duty pay;
  • For penalties imposed in good faith for infractions of safety rules of major significance;
  • For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace misconduct;
  • In the employee's first or last week of employment, if the employee does not work the full week; or
  • For unpaid leave taken by the employee under the Family and Medical Leave Act.

Conclusion

When considering payroll deductions and withholdings:

• Understand the various deductions made to employees’ pay, so you can explain them to employees.
• Obtain the employee’s consent if their authorization is required for the deduction.
• Comply with federal and state limits and prohibitions on deductions.