What is a Payroll Deduction?

A payroll deduction is an amount taken from each paycheck, like taxes, that reduces an employee's gross pay or total pay. Most payroll stubs list payroll deductions. Certain deductions are standard or required, and these will vary based on the country or state of employment and/or residency. Even more variable are voluntary deductions, which may include things like contributions to 401ks or to health insurance. Types of voluntary deductions tend to depend on the programs or employee benefits offered by an employer.

There is more than one standard payroll deduction in the US. Employers remove federal income taxes, state taxes, and Federal Insurance Contribution Act (FICA) or social security payments. In some states employers must also take out city, county or local taxes and payments for state unemployment and disability insurance. Amounts of each payroll deduction are usually based on the amount of money you make and may also be influenced by the number of exemptions you claim on your W-4 form.

In other countries, taxes and possibly payments to things like national health insurance make up the majority of standard or required payroll deductions. Some countries allow many full time workers to sign on as independent or non-contract workers. In this case, they are paid slightly more but must meet their tax obligations at the end of the year. Independent contractors in the US also don’t have any type of payroll deduction but must arrange to pay all required taxes at the end of each tax year.

Sometimes a payroll deduction is mandatory but only applies to the individual or to workers at a specific company or belonging to unions. Some mandatory contributions could include payment for parking fees, especially at universities. Another common pay deduction is when a person is forced by the court to have pay removed to cover things like child support or to pay back taxes. People belonging to unions can expect union dues to be deducted from pay.

A voluntary payroll deduction is often taken to help employees participate in programs that may provide them some benefit. Common deductions include payments to health insurance, payments to carry life insurance, contributions to 401ks and/or health savings accounts, and payments to disability plans. Some of these deductions will directly benefit employees at a future date. Making payments to retirement savings accounts or putting money in health savings or flexible spending accounts means the employee can eventually access that money. Though the pay is deducted, it isn’t gone but is simply designated.

In all, the number of payroll deductions reduces gross pay, possibly significantly, and employees should be able to see itemized lists of what is removed from pay. Many voluntary contributions are the same with each paycheck. Other deductions are contingent on the amount of pay and may vary if paycheck amounts differ each payday.