Payroll deductions: Types, tips, and compliance

Key takeaways:

• Payroll deductions directly impact employee take-home pay and tax reporting, so they need to be calculated accurately to avoid compliance issues or penalties.
• Some deductions are required by law, such as federal income tax, while others are voluntary, like retirement plans or health benefits.
• Pre-tax deductions lower an employee’s taxable income, while post-tax deductions do not, affecting the total tax the employee owes.
• Payroll software automates calculations and filings, helping employers stay compliant and reduce payroll errors.

Running payroll involves balancing taxes, benefits, and compliance without missing a beat. Payroll deductions play a bigger role than ever in staying compliant and keeping employees happy. To do that, you need to know which deductions are required, which are optional, and how each affects take-home pay.

This guide breaks down how payroll deductions work and explores the different types, helping you stay compliant and ensure your employees are paid correctly.

How do payroll deductions work?

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. 

As the employer, you're responsible for calculating these amounts each pay period and remitting them to the proper tax authorities or benefit providers on the employee’s behalf.

These deductions can be categorized in a few different ways, including whether they are mandatory or voluntary, and whether they are taken out before or after taxes.

Mandatory vs. voluntary payroll deductions

The law requires employers to pay mandatory deductions by sending them to the tax agencies. Federally mandated taxes, such as FICA tax and federal income tax, are standard payroll taxes that an employer must take out from an employee’s paycheck. Many employers choose to use a payroll provider to automate deductions and reduce errors.

Voluntary payroll deductions, on the other hand, aren’t required by law and only apply if an employee opts in. With employee consent, employers can withhold money for benefits like health insurance, retirement plans, charitable contributions, and other optional programs.

While voluntary deductions offer flexibility and valuable benefits to employees, employers are still key in making them available. Setting up and administering these deductions, such as insurance or retirement plans, requires:

• Selecting providers
• Establishing accounts
• Ensuring legal compliance
• Integrating the deductions into the payroll system

Pre-tax vs. post-tax deductions

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 help improve employee satisfaction.

What are the most common types of payroll deductions?

There are various payroll deductions that can either be mandatory or voluntary. Here are 12 of the most common:

1. FICA taxes

Mandatory, pre-tax 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%. Social Security tax is paid on wages up to $184,500 for 2026. Above this wage threshold, the rate is 0%. 

In contrast, Medicare tax is paid on all wages with no earnings limit. But for high earners, an additional 0.9% medicare tax applies to wages over $200,000 (single) or $250,000 (married filing jointly).

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.

2. Federal income tax

Mandatory, pre-tax payroll deduction

The amount of federal income tax you withhold depends on each employee’s Form W-4. Employees fill out the W-4 to tell you how much to withhold based on things like filing status, dependents, and additional withholding preferences.

For 2026, the W-4 has been updated to reflect new federal tax law changes. It now includes specific entries that allow employees to estimate qualified tips and qualified overtime compensation on the form’s deductions worksheet, which can further lower their withholding.

Because federal income tax is usually the largest deduction from an employee’s paycheck, keeping W-4 forms updated is essential for accurate withholding.

3. State and local income taxes

Mandatory, pre-tax 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 eligible pre-tax deductions will determine the amount you withhold for 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.

4. Federal unemployment tax

Mandatory, employer-paid tax

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. 

According to the IRS, FUTA tax is 6% of the first $7,000 of each employee's wages. However, employers can 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.

5. Wage garnishments

Mandatory, post-tax 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:

• Taxes
• Alimony
• Child support
• Defaulted loans

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.

6. Paid Family and Medical Leave (PFML)

Mandatory, post-tax payroll deduction

Paid family and medical leave (PFML) is a mandatory benefit that allows employees to receive regular payments to make up for lost income when they are unable to work. For 2026, 13 states and the District of Columbia have enacted these programs.

Employees can use this leave for reasons such as their own serious illness, pregnancy, childbirth, adoption, or to provide care for a family member. Depending on your state’s laws, the employer may cover the full payroll tax. In some states, the cost is split between the employer and employee through a small paycheck deduction.

7. Health, disability, and life insurance

Voluntary, pre-tax 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.

8. Retirement plan contributions

Voluntary, pre-tax 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 401(k) must be post-tax.

The IRS increased the 401(k) contribution limit to $24,500 in 2026.

9. Union dues

Voluntary, post-tax 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.

10. Job-related expenses

Voluntary, post-tax payroll deduction 

Other job expenses an employee might deduct include:

• Meals
• Travel
• Uniforms
• Home office equipment
• Parking
• Transit
• Medical exams. 

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.

11. Charitable contributions

Voluntary, post-tax 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.

12. Health and wellness

Voluntary, post-tax payroll deduction

Wellness programs are a popular perk that often include payroll deductions for things like discounted gym memberships, weight-loss programs, or preventative health screenings. Beyond these deductions, some programs also offer financial incentives, such as payouts or rewards for hitting specific health goals.

While some benefits can be tax-free, reimbursements or cash rewards for employees are typically considered taxable income. As the employer, you may be able to deduct subsidies for gym memberships as a business expense in the year they were paid.

How to calculate payroll deductions

Calculating payroll is the process of taking an employee's total earnings (gross pay) and subtracting the necessary amounts to reach their take-home (net) pay.

Here’s the step-by-step order:

1. Subtract pre-tax contributions for health insurance, 401(k) retirement plans, and other voluntary benefits from the employee's gross pay.
2. Use the employee’s Form W-4 and the 2026 IRS tax tables to determine the correct federal income tax withholding.
3. Withhold 7.65% of adjusted wages for Social Security and Medicare taxes.
4. Stop the 6.2% Social Security portion once an employee’s 2026 earnings reach the $184,500 wage base limit.
5. Apply an additional 0.9% Medicare tax for any employee whose year-to-date income exceeds $200,000.
6. Calculate state and local income tax withholding based on the requirements in your specific state’s 2026 employer tax guide.
7. Subtract any post-tax deductions, such as wage garnishments, Roth 401(k) contributions, or union dues, to reach the final net pay.

Tips for managing paycheck deductions

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: 

• Ensure you have up-to-date employee records: This includes having a process in place for updating employee pay rates, addresses, and tax withholdings.
• Track employee hours reliably: Use time-tracking software or apps, paper timesheets, or time clocks to ensure precise payroll if you have hourly employees. 
• Create a payroll policy: Establish a clear policy outlining the payroll process, employee classifications, salary determinations, and reporting obligations. 
• Categorize employees accurately: Properly classify employees as hourly or salaried to comply with legal regulations, and adhere to the Fair Labor Statistics Act (FLSA). 
• Invest in a payroll system: Pick a system that works best for your business, whether it’s manual processing, outsourcing, or using payroll software.

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.

Next steps for streamlining your payroll process

Managing payroll deductions across multiple employees and changing tax rules can get overwhelming fast. But the good news is you don’t have to manually manage payroll processes.

Payroll software like QuickBooks Payroll, and now Intuit AI agents, can help you automate calculations, stay compliant, and reduce data entry mistakes before they happen.

Disclaimer:

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