Are Payroll Deductions the Same for All Employees? [Types + Differences]

Andrew Moran - Writer for TBR
By Andrew Moran
Nevena Radulović - Trusted Brand Reviews Editor
Edited by Nevena Radulović

Updated December 26, 2022.

Close-up of a woman's hands typing on a laptop with payroll documents next to it

Everyone has been on the receiving end of a payroll deduction—it's a mandatory and voluntary component of employment and business operations. Payroll deductions are wages withheld from an employee's paycheck for the purpose of paying taxes, employee benefits (health insurance, unemployment insurance, or retirement pension schemes), or garnishments.

A critical aspect of payroll deductions is accuracy since the company might be responsible or held liable for the missing amounts. As a result, it's imperative to understand the different types of payroll deductions—this article will help you learn all about them.

» What type of tax should employees pay? Learn about payroll tax vs. income tax

Different Types of Payroll Deductions

It should be noted that the total amount of payroll deductions can depend on a variety of factors, such as where employees live (whether they're remote employees), workers' gross wages, work status (whether they're independent contractors or full-time employees), and age. As a reminder, here's the federal payroll tax rate for 2022: 15.3% (7.65% by the employee and 7.65% by the employer).

Overall, there are three primary categories of payroll tax deductions.

Pre-Tax Deductions

Pre-tax deductions are funds subtracted from employees' gross pay prior to the taxes withheld from the paycheck to cover the cost of benefits. The idea behind a pre-tax deduction is to minimize employees' taxable income and cause less income tax to be owed. It should be noted this plan can be voluntary.

Now, the withholdings might include:

  • Health insurance: Although companies may offer health coverage like dental and medical, business experts say it's better for employees and employers to pay insurance premiums on a pre-tax basis.
  • Life insurance: If employees choose to incorporate life insurance into their terms of employment, they can deduct the money from their pay on a pre-tax basis.
  • Retirement plans: Employers will provide a whole host of retirement plans, primarily a 401(k) or individual retirement account (IRA).
  • Job-related expenses: This is money spent on work-related expenses, from parking to vehicle ownership to travel.

Mandatory Deductions

On the other hand, there are mandatory payroll deductions that can't be avoided, no matter what your employment status is or how large or small the organization is at any given time. So, what are they?

  • FICA tax: This is the Federal Insurance Contributions Act (FICA) deducted to fund Medicare and Social Security programs.
  • Federal income tax: The federal income tax is applied to everything that can be viewed as income: salaries, hourly wages, gifts, unemployment benefits, bonuses, tips, and much more.
  • State & local tax: The state and local income tax will depend on the jurisdiction. So, for example, if employees are employed in New York, they'll be subject to a state/local income tax. However, if they're working in Texas, they won't face a state or local income tax.

» How to reduce payroll tax? See 5 legal steps employers can take

Post-Tax Deductions

Post-tax deductions occur when money is taken from employees' paychecks after the taxes have already been withheld. It should be pointed out that post-tax payroll deductions don't impact your tax liability. However, while this can include charitable contributions and union dues, the most common post-tax deduction is the following:

  • Wage garnishments: Wage garnishments are withheld on a post-tax basis and are never voluntary since they're typically determined by court order so employees cover an unpaid debt.

» How can employers ensure payroll compliance? Follow these steps to avoid penalties

Confidently Manage Payroll Deductions With Payroll Software

In the end, it's of the utmost importance for all businesses, be it multi-national corporations or startups, to maintain an internal accounting system that will accurately cover payroll deductions and take into account a broad array of factors, from employees' locations to their tax status.

For organizations that don't have the manpower or the technology in place, like small businesses with less than 10 employees, it would be a worthwhile investment to hire a payroll or HR expert, business accountant, or tax advisor, or opt for the right payroll software to ensure peace of mind.

» Want to confidently manage your payroll deductions? Read TBR's payroll software reviews and find the right solution for your needs.

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