What Are Deductions from Wages?

K. Kinsella

Deductions from wages are sums of money that employers withhold from employees paychecks. In some instances, employers are required by law to withhold some payments, while in other instances various types of withholdings are optional. Aside from reducing an employee's take-home pay, deductions from wages can also reduce an individual's income tax liability. Employers can withhold funds from both direct deposits and from traditional paychecks. Typically, an employer must provide each employee with an itemized payroll statement the details all of the amounts that were withheld during the current pay cycle.

All deductions are listed on the pay stub.
All deductions are listed on the pay stub.

In many countries, employers are required to withhold income tax from the wages of workers. Since taxes are normally based on annual earnings, employers make deductions based upon each individual's projected income. Aside from withholding funds to cover national income tax, many companies are also required to withhold funds to cover municipal or regional income tax. Additionally, government agencies can also instruct employers to set aside a portion of an employee's wages to cover debt payments. People who take out government backed student loans or mortgages sometimes see their loan repayments automatically subtracted from their paycheck.

Employees make contributions to their pension, or take a slightly lower wage in order to be able to collect a pension at a later date.
Employees make contributions to their pension, or take a slightly lower wage in order to be able to collect a pension at a later date.

Workers often make contributions to the employer sponsored pension plans by instructing the payroll department to make automatic wage deductions. In countries where no national health service exists, deductions from wages are often used to purchase health insurance. Other types of standard wage deductions include life insurance premiums, pension plan loan repayments and company stock purchases.

While employers are normally able to withhold funds to cover taxes without an employee’s consent, companies typically have to receive written consent from a worker before deductions from wages are taken to cover optional expenses such as pension plan contributions. In some areas, an employee must specify the amount and frequency of a deduction before an employer starts to withhold funds. Employers that make unauthorized payroll changes can face penalties including fines.

Some deductions from wages occur on an after-tax basis. When this occurs, the employee in question has to pay income tax on the entire amount of the pre-tax paycheck. Expenses such as health insurance premiums and pension plan contributions are normally subtracted on a pre-tax basis and an employee's tax liability is reduced as a result of these deductions. Laws in some countries place a cap on the amount of pre-tax deductions from wages that an employee can authorize. At the end of the tax year, employers often have to withhold extra funds to cover taxes for individuals whose annual pre-tax deductions exceeded maximum limits.

A W-2 statement lists tax deductions withheld from an employee's annual wages.
A W-2 statement lists tax deductions withheld from an employee's annual wages.

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Discussion Comments


As far as the deductions that employers are required to take, I think overall this is a good idea. Most people aren't disciplined enough to set aside the money they would need to pay their taxes or social security at the end of the year.

If you have ever worked in a sales job or were considered an independent contractor, you know how much discipline this takes.

As far as deductions for retirement plans and insurance, the same concept holds true. These deductions can force us to save and have the money needed to pay for our medical expenses.

Even though it seems like a lot of money being deducted, I don't think I would ever have the discipline to save and pay for these things every time I got paid.

I would be too tempted to spend the money and tell myself I would start saving the next time I got paid. A whole year could go by and I might not have set aside one cent.


I know of situations where someone has funds garnished from their wages to pay for outstanding debt. Some people also receive back child support because their ex has their wages garnished.

While I can understand this, I have never known of a situation where they automatically deducted mortgage payments from a paycheck. I'm not so sure I would like this idea, but if it was a government backed loan, I don't suppose you would have much choice in the matter.


I remember when my daughter graduated from college and began making a good salary, she was surprised at the amount of money that was deducted from her paychecks.

All of her jobs before this had been small, part-time jobs where it didn't seem like as big of a deal. It can be quite a shock at first when you start calculating how much you really have left for yourself.

I know some people who change the amount of exemptions they have so they will have less money deducted from their check. If I did this, I would be afraid I would owe more money at the end of the year, and would have a hard time coming up with it.


After all the deductions that are withheld from my paycheck, I don't feel like I have much left to live on. Many of the deductions are required, but I also have some funds automatically deposited into a savings account.

In one sense because I never see the money or have it in my hands, I never miss it. You get used to living on the amount of money you get each pay period. I also know that if there was an emergency situation, I would have the money in the savings to pay for it.

On the other hand when I look at the percentage of funds that are withheld from my total earnings, it seems like an awful lot of money that would be nice to have access to.

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