What are payroll deductions?
Payroll deductions are money taken out of an employee’s paycheck for paying taxes, contributing to retirement plans, or paying for health benefits like health insurance.
In 2025, accurate and timely payroll is more critical than ever. This means navigating the complexities of payroll deductions with precision. As a business owner, you need to know which deductions are mandatory, which are voluntary, and where to remit these funds.
This guide breaks down how payroll deductions work and explores the different types, helping you stay compliant and ensure your employees are paid correctly.
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Payroll deductions are wages taken out of employees’ paychecks to pay for costs like payroll and income taxes, employee benefits, and more. They determine an employee’s net pay, also known as their take-home pay. Payroll deductions can also be voluntary or mandated:
The law requires employers to pay mandatory deductions by sending them to tax agencies. Federally mandated taxes, such as FICA tax and federal income tax, are standard payroll taxes that must be taken out from an employee’s paycheck. Many employers choose to use a payroll provider to automate deductions and reduce errors.
Unlike mandatory payroll deductions, voluntary payroll deductions aren’t required by law. With employee consent, employers can take some deductions from their paychecks. An employee must opt in if they want to take part in certain benefits.
While voluntary deductions offer flexibility and valuable benefits to employees, it's important to remember that employers play a critical role in making these options available.
Setting up and administering voluntary deductions like retirement plans or health insurance requires careful planning and infrastructure. This includes selecting providers, establishing necessary accounts, ensuring legal compliance, and integrating these deductions into the payroll system.
Some payroll deductions happen before other taxes are withheld—known as pre-tax payroll deductions. Meanwhile, certain deductions are only taken out after tax withholding—these are known as post-tax payroll deductions.
Pre-tax deductions are taken from an employee’s gross pay before any payroll taxes are withheld. Like employee tax deductions, pre-tax deductions reduce an employee’s taxable income, which is the money they owe to the government. Common pre-tax deductions include health insurance and retirement plans.
On the other hand, employers withhold post-tax deductions from an employee's net pay. Common post-tax deductions include wage garnishments and job-related costs like travel.
Many employees don't fully understand how deductions work, leading to confusion and frustration. A short presentation during onboarding can clear things up and improve employee satisfaction.
There are various payroll deductions that can either be mandatory or voluntary. Here are eight of the most common:
Mandatory payroll deduction
Federal Insurance Contributions Act (FICA) taxes include Social Security taxes and Medicare taxes. Employee and employer contributions for FICA are equal, with the current rate being 6.2% of gross wages coming out of an employee’s paycheck for Social Security and 1.45% going to Medicare. Employers match both of these contributions for a total of 15.3%.
If a company doesn’t report these taxes, it can get in trouble with the law. The amount an employee pays in FICA taxes per pay period depends on their pre-tax deductions, which lower their taxable income.
Mandatory payroll deduction
The amount of federal income tax you’ll withhold from your employee’s paychecks will depend on their Form W-4. Each employee will fill out a W-4 form, one of these forms, and the amount of federal income tax withholding.
Using a W-4 form, your employees can choose to have a certain amount deducted from their taxes. Deductions are decided by a bunch of parameters—the W4 serves as both a form and an instruction sheet for the employee.
Mandatory payroll deduction
Like federal income taxes, state and local payroll taxes are mandatory payroll deductions and must be paid to the appropriate tax authorities. Each state sets its income tax rate. An employee’s gross income and any pre-tax deductions will determine the amount they pay in state and local taxes.
If you work in one state, and all of your employees live in that state, then the state tax you’ll owe is pretty straightforward. However, if you have multiple offices in different states or remote employees in different states, your state payroll liabilities will be a bit more complicated.
Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming are states with no income tax.
Mandatory payroll deduction
Unemployment taxes are paid by employers to fund federal and state unemployment programs. These programs provide temporary financial assistance to workers who have lost their jobs through no fault of their own. At the federal level, the Federal Unemployment Tax Act (FUTA) dictates the tax, while state unemployment taxes (SUTA) vary by location.
Employers are responsible for paying FUTA tax and reporting it on Form 940.
FUTA tax is 6% of the first $7,000 of each employee's wages. However, employers can generally receive a tax credit of up to 5.4% if they pay their SUTA taxes on time, reducing the effective FUTA tax rate to 0.6%.
SUTA tax rates and wage bases (the maximum amount of wages subject to tax) vary by state.
Mandatory payroll deduction
Employees with unpaid debt or other obligations may have wage garnishments as payroll deductions. Wage garnishments are sent by a court or government agency like the IRS and require employers to withhold money from an employee’s paycheck.
The deductions are on a post-tax basis and usually go toward debts or obligations like:
The wage garnishment letter will explain how much of an employee’s paycheck has to be withheld and where the money has to be sent.
Voluntary payroll deduction
Health insurance and other premiums are voluntary payroll deductions that are typically made on a pre-tax basis. If you offer health benefits for your employees, you can have them pay part of their premiums via paycheck deductions. This also includes other health benefits, such as dental insurance or health savings plans.
Voluntary payroll deduction
As another employee perk, companies can offer retirement plans, such as a 401(k) plan that lets employees save for retirement. Employees can have a part of their paycheck withheld as a voluntary deduction and invested in their 401(k).
An employer can offer a few retirement plan options, and the type of retirement plan will determine whether it’s pre-tax or post-tax. For example, money put into a traditional 401(k) can be pre-tax, while money put into a Roth IRA must be post-tax.
Educate employees about the benefits of participating and starting early: Many people under-estimate how much they need to save for retirement.
Voluntary payroll deduction
Members of unions usually make regular payments to the union they’re a member of. These dues are post-tax, so they won’t offer a tax benefit.
Union dues can go toward an employee’s membership, along with other taxable benefits offered by the union, which are all deducted on a post-tax basis.
Voluntary payroll deduction
Other job expenses an employee might deduct include:
These job-related costs are also deducted on a post-tax basis.
Keep detailed records of any job-related expenses deducted from employee paychecks. This will help ensure compliance with tax laws and make it easier to answer any employee questions about these deductions.
Voluntary payroll deduction
Employees can choose to make charitable contributions directly from their paychecks. These deductions are typically post-tax, but they can be pre-tax if the employer has a workplace giving program that partners with a qualified charitable organization.
The advantage of payroll deductions for charitable giving is convenience. Employees can set up recurring donations to their favorite charities without having to write a check or make an online payment each time. Employers may also choose to match employee contributions, further incentivizing charitable giving.
Once you have all your payroll deductions in order, you’ll want a way to manage them effectively.
Here are some tips for staying on top of paycheck deductions:
How you manage your payroll will depend largely on your budget and time available, as well as your confidence in keeping all your payroll tasks in order.
Regularly audit your payroll deductions to ensure accuracy. Mistakes can be costly and time-consuming to fix.
There are plenty of payroll deductions you need to know. From the mandatory ones to the voluntary ones—not to mention what should be withheld on a pre-tax vs. post-tax basis. Payroll software like QuickBooks Payroll can make managing all your payroll deductions seamless, including filing and paying your payroll taxes accurately and on time.
QuickBooks Online Payroll & Contractor Payments: Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services, subject to eligibility criteria, credit and application approval. For more information about Intuit Payments Inc.’s money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/
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