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Payroll Guide: Deductions

Updated: Jan 27, 2023

As a business owner, one of your top priorities should be getting your employees paid on time and accurately. However, in addition to paying your employees, you are also responsible for withholding a portion of their income through payroll deductions.

Taxes, garnishments, and benefits are deducted from an employee's total compensation, and once those deductions are made, employees are left with their take-home pay (more commonly referred to as net pay). Social security tax, Medicare tax, state and federal taxes, and retirement plan payments are all examples of common payroll deductions.

Understanding payroll deductions is essential if you want to ensure that your employees' paychecks are accurate each pay period and that you're on top of any required tax withholdings or premium payments for each employee. Payroll deductions can be broken down into two different categories—mandatory and voluntary.

Mandatory Payroll Deductions

Mandatory payroll deductions are, as the name suggests, mandatory. This means withholding mandatory deductions is required by law.

Payroll taxes are a great example of mandatory deductions. As an employer, you must deduct payroll taxes from your employees and submit them to the appropriate tax agency. Failure to do so could result in harsh penalties and fines.

Some of the different tax deductions that you are required to withhold from your employees’ paycheck include:

Federal Taxes

Every citizen in the United States needs to pay federal taxes, and your employees are no different. Each employee's income tax withholding is determined by their gross pay and IRS form W-4. ‍

State Taxes

Although different states have different tax structures, all 50 states require employers to withhold state taxes for their employees. Most states allow employees to elect their withholdings using the W-4 form. However, in 2020, California decided to change its withholding schedule where all new employees and existing employees must submit their withholding using form DE 4.

Local Taxes

Depending on the municipality your business operates in, you may be required to withhold local taxes for your city or county.

‍Social Security and Medicare Tax

Employers are also required to withhold taxes for Social Security (6.2%) and Medicare (1.45%) from employees’ paychecks under the Federal Insurance Contributions Act (FICA). Aside from withholding FICA taxes from employees, employers must also pay FICA taxes.

Court Ordered Deductions

There are certain circumstances where a court may order an employer to withhold an employee’s pay. Some examples of this are wage garnishments or court-ordered child support payments.

Voluntary Payroll Deductions

There are a variety of non-required withholdings that you may need to deduct from your employees' paychecks. These deductions are known as voluntary payroll deductions.

These voluntary deductions typically stem from employee benefits. These differ from mandatory deductions because your employees must opt-in for you to start withholding voluntary deductions from their paycheck. Opting in requires your employees to give written authorization to withhold pay.

Some voluntary payroll deductions include:

Retirement Plans

‍Many companies have some sort of retirement plan in place for their employees. This could be a 401k or IRA account. The employee chooses how much of their paycheck to contribute toward retirement, where it’s the employer’s responsibility to deduct the correct amount.

Health Insurance Premium

Health insurance plans are the most popular benefits employers offer. If you provide health insurance to your employees, including dental and vision coverage, the premiums are deducted from their income.

Flexible Spending Account or Health Savings Account Contributions

If you offer flex spending or health savings accounts, employees can choose to contribute pre-tax dollars to these accounts. The employer is then responsible for deducting those contributions from their paychecks.

Life Insurance or Disability Premiums

Similar to health insurance, if you offer life and disability insurance, the plan premiums would be deducted from the employee’s paycheck.

Charitable Giving

Employees might choose to have donations deducted from their wages if your company has a charitable giving program.

Union Dues

You may need to deduct union dues from your employees' gross income if they are members of a union. ‍

Understanding Payroll Deductions

As a business owner, you’ll need to deduct a variety of payroll deductions from your employee’s gross pay. It’s also important to ensure that you understand all mandatory and voluntary payroll deductions and how much must be withheld from each paycheck. Failure to do so can result in harsh penalties and cause problems for employees.

Payroll deductions can be confusing, not to mention the headaches and boatloads of time it takes to accurately process payroll. With Cornerstone PEO you don’t have to worry about any of it. When it’s time for your employees to be paid, Cornerstone automatically calculates all mandatory and voluntary deductions for each employee while withholding the correct amount. Cornerstone handles payroll so you can focus on running your business.

The Cornerstone Advantage

Cornerstone PEO is a full service Professional Employer Organization (PEO) that offers payroll, workers comp, employee benefits, compliance, and HR services. Cornerstone has been recognized as one of the best payroll services in the country with industry high payroll accuracy.

Like other PEOs, Cornerstone will help you save significantly on employee benefits, automate your payroll, lower your experience modifier, and help with certain employee related compliance. However, unlike other PEOs, our focus is on excellent customer service.

Other PEOs will just add you to their system and send you an invoice. At Cornerstone we assign a professional customer service rep to work with your account. This not only adds more of a human touch, but it also allows us to create custom solutions unique to your business. Got questions? We have a rep to help you answer them. A problem occurred? You have a rep who understands your business and can create an effective solution.

Contact us here for a FREE consultation.


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