What Are Payroll Deductions?

You know there are deductions to take out of your employees’ paychecks. But, are they pre-tax vs. post-tax deductions? What do you withhold from an employee’s take-home pay? What are payroll deductions? Read on to learn the different deductions you have to take out of each employee’s paycheck.

What are payroll deductions?

Payroll deductions are amounts employers take out of an employee’s paycheck each pay period. An employee’s gross pay is different than their net pay, or take home pay, because of the deductions subtracted. There are both mandatory and voluntary payroll deductions. Examples of payroll deductions include federal, state, and local taxes, health insurance premiums, and job-related expenses.

Mandatory payroll deductions

By law, employers must withhold payroll taxes from employee wages and submit them to tax agencies. These taxes are statutory employee deductions from payroll. Failure to pay payroll taxes can lead to penalization.

FICA tax and federal income tax are federally-mandated taxes. You must report them on Form 941 or Form 944 and remit them electronically using EFTPS (Electronic Federal Tax Payment System).

FICA tax

Federal Insurance Contributions Act (FICA) tax includes Social Security and Medicare taxes. Both the employee and employer contribute to FICA tax equally. Social Security tax is 6.2% of an employee’s income if it is at or below the Social Security wage base. Medicare tax is 1.45% of the employee’s Medicare taxable wages. The total deduction for FICA is 7.65% from an employee’s paycheck. As the employer, you must also pay a 7.65% contribution.

What are payroll taxes used for? FICA taxes cover public care. Social Security taxes go toward those who are retired, disabled, or to the families of the deceased. Medicare pays for hospital-related benefits like hospice care and home health care

Federal income tax

Federal income tax is based on your employees’ Form W-4 information and their gross pay. You can use the income tax withholding tables in the IRS’s Publication 15-T to calculate the amount withheld from an employee’s paycheck.

Federal income taxes go toward public services such as transportation, education, and the military.

State and local taxes

Each state has its own income tax structure. To find out how much you need to withhold from an employee’s paycheck for state and local taxes, check with your state. If you are a new employer, consult our state-by-state list of payroll information for employers.

Like federal taxes, state and local taxes go toward public services.


Wage garnishments are necessary if one of your employees has an unpaid debt. If you need to withhold garnishments from an employee’s paycheck, you will receive an order from a court or government agency with more information.

Garnishments can range from 15% – 70% of an employee’s paycheck, depending on their debt.

Voluntary payroll deductions

In addition to mandatory payroll deductions, you may need to withhold extra money. Voluntary payroll deductions require employee consent. To participate in different benefits, employees must opt in.

Health insurance premiums

Health insurance deductions will vary based on what you offer at your small business and the plan your employee chooses. Insurance coverage includes doctor visits and prescriptions.

Retirement plans

If you offer a retirement plan, your employee can opt into having money withheld for a personal retirement fund. The money an employee contributes now will benefit them when they retire. There are many different small business retirement options like an IRA (Individual Retirement Account) or a 401(k).

Life insurance premiums

An employee can choose to have deductions taken out of their paychecks to go toward a life insurance premium. In the event of your employee’s death, their life insurance provides their beneficiaries with payment.

If your small business charges employees job-related expenses such as union dues, uniforms, and meals, you will need to deduct them from your employee’s paycheck.

Do you need help with your payroll? Make it easy on yourself and try Patriot Software’s online payroll software. We offer free setup and support so you can run payroll hassle-free. And, Patriot’s Full Service Payroll will deduct, file, and remit federal, state, and local taxes for you.

This article was updated from its original publish date of 04/23/2012.

This is not intended as legal advice; for more information, please click here.

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