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.
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.
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.