What Are Payroll Deductions? Types, Examples, and Rates

Payroll Deductions

Flori Meeks Hatchett

November 3, 2026

•

5 min read

Payroll deductions are amounts an employer withholds from an employee's gross pay each pay period for taxes, benefits, and other obligations. Some are required by law, such as federal income tax, Social Security, and Medicare, while others are elected by the employee, such as 401(k) contributions and health insurance premiums.

Table of contents

What are payroll deductions?

Payroll deductions turn an employee's gross pay, the total amount earned before any deductions, into take-home pay, also known as net pay. They're how you meet legal obligations like federal and state income taxes, and how employees pay for benefits such as health insurance, retirement savings, or flexible spending accounts out of each paycheck.

Employers are responsible for calculating and withholding the appropriate amounts from employee pay and submitting them as required.

With SurePayroll® By Paychex, you can pay employees and contractors, manage payroll taxes.

Types of payroll deductions

There are two main types of payroll deductions: mandatory and voluntary.

Mandatory deductions are required by law and cover things like employee tax deductions. Voluntary deductions are chosen by the employee and often include benefits such as health insurance or retirement contributions.

Payroll deduction chart
Deduction Type	Mandatory/Voluntary	Pre- or Post-Tax	Common Examples
Federal Income Tax	Mandatory	Calculated on taxable wages after pre-tax deductions	Based on federal withholding from Form W-4, Employee's Withholding Certificate
Social Security (FICA)	Mandatory	Calculated on wages after most cafeteria plan (Section 125) deductions; 401(k) deferrals don't reduce these wages	Employers must withhold Social Security tax (6.2%) from employee wages, up to the annual wage base, and match the amounts
Medicare (FICA)	Mandatory	Calculated on wages after most cafeteria plan (Section 125) deductions; 401(k) deferrals don't reduce these wages	Employers must withhold Medicare tax (1.45%) from employee wages, and match the amount
State/Local Income Taxes	Mandatory, where applicable	Generally calculated on taxable wages after pre-tax deductions; rules vary by state	State, city or local income taxes
Wage Garnishments	Mandatory, if required by a court or agency order	Post-tax	Child support, default student loans, tax levies, and others
Health Insurance Premiums	Usually voluntary	Often pre-tax, in some cases could be post-tax	Medical, dental, vision
Retirement Plan Contributions	Voluntary	Traditional is pre-tax; Roth is post-tax	401(k), SIMPLE IRA, Roth 401(k), and others
Health Savings/FSA Contributions	Voluntary	Pre-tax when made through a Section 125 cafeteria plan; HSA contributions made outside a cafeteria plan are deducted on the employee's tax return instead	HSA, FSA
Other Employee Benefits	Voluntary	Pre- or post-tax depending on plan	Commuter, group life, supplemental insurance, and others
Union dues, other deductions	Voluntary	Generally post-tax	Union dues, association fees, and others

For example, an employee earns $1,500 in gross pay and contributes $100 to a traditional 401(k). Social Security tax is 6.2% of $1,500, or $93.00, and Medicare tax is 1.45% of $1,500, or $21.75, because 401(k) deferrals are still subject to Social Security and Medicare tax. Income tax withholding is figured on the $1,400 left after the deferral. With an estimated $120 in federal and state income tax withholding, total deductions come to $334.75 and net pay is $1,165.25.

Actual amounts vary with W-4 elections, state, and benefit choices. To see an estimated breakdown for your own numbers, try the payroll deduction calculator.

Mandatory payroll deductions

Examples of mandatory payroll deductions, also known as statutory deductions, can include:

Federal income tax: Federal income tax is the amount the federal government requires employers to withhold from employee paychecks based on earnings, filing status, and the other information employees provide on Form W-4. Federal income tax withholding generally applies to taxable wages, including salaries, bonuses, and tips. Workers with very low earnings or certain exemptions may not be required to pay federal income tax. This amount is determined based on how employees complete their Form W-4.
Social Security and Medicare (FICA): Social Security and Medicare taxes are required payroll deductions under the Federal Insurance Contributions Act (FICA). Employers must withhold a portion of each employee's wages to fund these programs, which provide retirement, disability, and health benefits. Employers contribute an equal amount.
State and local income taxes (where applicable): State income tax requirements vary across the U.S. Some states charge a flat rate on all income, others use multiple tax brackets, and a few don't levy any income tax at all. Because rules differ, and some states follow the federal tax code, employers need to follow the applicable requirements in each state where employees work.
Wage garnishments (court- or agency-ordered deductions): Wage garnishment is a legal process that requires employers to withhold part of an employee's earnings to repay debts such as taxes, child support, or court-ordered judgments. The employer sends the withheld amount directly to the agency or creditor until the debt is paid off.

Employers may face fines or penalties if they fail to withhold mandatory payroll deductions correctly.

Voluntary payroll deductions

Voluntary payroll deductions examples include:

Retirement savings contributions (401(k), etc.): Retirement savings plan contributions allow employees to save part of their earnings for future financial security through plans such as a 401(k). Employers deduct these contributions directly from paychecks, and depending on the plan type, the contributions may be made before or after taxes.
Health, dental, and vision insurance: Health, dental, and vision insurance premiums are voluntary deductions that can help employees access medical plans and care. Employers can deduct premium contributions directly from employee paychecks, often on a pre-tax basis, which reduces employees' taxable income.
Life insurance: Depending on the plan, life insurance deductions may be taken on a pre-tax or post-tax basis.
Flexible spending accounts (FSAs): An FSA lets employees save money to cover eligible healthcare or dependent-care expenses. FSA contributions are salary reductions made through a Section 125 cafeteria plan, so employers deduct them from paychecks before taxes are calculated, lowering taxable income.
Union dues: Union dues are voluntary deductions that cover membership costs for employees represented by a labor union. These funds support collective bargaining, contract negotiations, and other activities that benefit union members.
Charitable donations: Some employers allow workers to donate to approved charities directly through payroll deduction. This option lets employees spread out donations across multiple pay periods to support causes they care about throughout the year.

Voluntary payroll deductions may require employees' written consent before being withheld from their paychecks.

Payroll deduction abbreviations

Payroll deductions often appear on pay stubs as abbreviations, each representing a specific tax or insurance required by federal, state, or local law. Some deductions are withheld only from employee pay, some are paid solely by employers, and others are shared between both parties. Knowing these codes makes it easier to read a pay stub and see what was withheld and who pays it.

Common abbreviations include:

FED: Federal income tax withheld, as required by the IRS. (Employee)
FICA: Federal Insurance Contributions Act tax, which includes Social Security and Medicare taxes. (Employee and employer)
LOCAL: Local income tax withheld, if applicable in your city or municipality. (Employee)
MED: Medicare tax, part of FICA, funds federal health insurance for people 65 and older and some younger people with disabilities. (Employee and employer)
SUI: State Unemployment Insurance tax, which funds unemployment benefits. (Employer only in most states)
SDI: State Disability Insurance tax, withheld in certain states to provide disability benefits. (Generally withheld from employee pay; requirements vary by state)
SS: Social Security tax, part of FICA, funds retirement and disability benefits. (Employee and employer)
STATE: State income tax withheld, as required by your state's tax authority. (Employee)
WKC: Workers' Compensation Insurance, which provides benefits for job-related injuries or illnesses. (Requirements vary by state, typically paid by employer.)

Pre-tax vs. post-tax deductions

Not all payroll deductions affect take-home pay in the same way. Some are deducted before taxes are calculated, reducing taxable income, while others are withheld after.

Knowing the difference between pre-tax and post-tax deductions helps employers apply each deduction at the right step in payroll and helps employees make the most of their benefits.

What are pre-tax deductions?

Pre-tax deductions are amounts taken from an employee's paycheck, or gross pay, before federal, state, and sometimes local taxes are calculated. Because they lower an employee's taxable income, they can reduce the total amount of taxes owed.

Common pre-tax deduction examples include contributions to retirement plans such as 401(k)s, eligible health and dental insurance premiums, FSA contributions, and health savings account (HSA) contributions made through a Section 125 cafeteria plan.

Pre-tax deductions don't all work the same way for Social Security and Medicare. Eligible health insurance premiums and FSA or HSA contributions made through a Section 125 cafeteria plan also reduce wages subject to Social Security and Medicare tax. Traditional 401(k) deferrals lower the wages subject to income tax withholding, but they're still subject to Social Security and Medicare tax.

Employers can also benefit. Because most cafeteria plan deductions lower the wages subject to Social Security and Medicare tax, they lower the employer's share of those payroll taxes too.

What are post-tax deductions?

Post-tax deductions are amounts withheld from an employee's paycheck after taxes have been calculated and withheld. Because these deductions don't reduce taxable income, they don't offer an immediate tax benefit. Common examples of post-tax payroll deductions can include Roth 401(k) contributions, some disability insurance premiums, union dues, and wage garnishments.

The key difference between pre-tax and post-tax deductions lies in when they're taken from pay and how they affect taxable income. Here's a comparison.

Pre and post tax deductions
	Pre-Tax Deductions	Post-Tax Deductions
When Deducted	Before taxes are calculated	After taxes are calculated
Impact on Taxable Income	Lowers taxable income	Does not reduce taxable income
Tax Benefit	Immediate, reduces income tax owed now	None now, but some may offer tax benefits later (e.g., Roth 401(k))
Common Examples	401(k), eligible health insurance premiums, FSA contributions, HSA contributions made through a Section 125 cafeteria plan	Roth 401(k), some life insurance, union dues, wage garnishments
Employer Perspective	Most cafeteria plan deductions can lower the employer's share of Social Security and Medicare tax	Supports employee choice and retention, though no direct tax savings

How to calculate payroll deductions

Payroll deductions are processed each pay period based on applicable tax laws and withholding information provided by employees or court or agency orders.

Employers can calculate deductions manually or automate the process with a payroll service. Many small businesses prefer automation because it helps minimize mistakes and can help manage payments to tax agencies.

The amount withheld for each employee depends on several factors, including their Form W-4, state and local withholding certificates, and benefit selections. For example, deductions may vary depending on whether an employee participates in a health insurance plan or is subject to a court-ordered garnishment.

Your company's location and where employees perform their work also affect payroll deductions, since not every state imposes an income tax.

A typical payroll deduction calculation follows these steps:

Determine gross pay. Start with the employee's total earnings for the pay period, including hourly wages, salary, bonuses, or commissions. Learn more about the difference between gross pay and net pay in this post.
Subtract applicable pre-tax deductions, such as eligible health insurance premiums, FSA contributions, HSA contributions made through a Section 125 cafeteria plan, and traditional 401(k) contributions. These reduce the wages subject to income tax withholding. Most cafeteria plan deductions, such as pre-tax health insurance premiums, also reduce the wages subject to Social Security and Medicare tax, but 401(k) deferrals don't.
Calculate and withhold mandatory taxes. Use the employee's Form W-4 information to calculate federal income tax withholding. Then apply FICA taxes to Social Security and Medicare wages: 6.2% for Social Security tax up to the annual wage base ($184,500 for 2026 and $192,300 for 2027) and 1.45% for Medicare. Starting in the pay period in which an employee's wages for the calendar year pass $200,000, withhold the 0.9% Additional Medicare Tax on wages above that amount. Don't forget to include state and local income taxes where applicable.
Apply post-tax deductions. Subtract any remaining deductions, such as Roth 401(k) contributions, wage garnishments, or union dues.
Calculate net pay. The remaining amount after all deductions is the employee's net pay: the amount you deposit into their account.

Payroll deductions involve a lot of moving parts, but a few smart habits can help make the process easier and more reliable:

Double-check deduction rates and contribution limits each year, since tax laws and benefit thresholds often change.
Keep employee records current, including W-4 and benefits selections.
Verify that both employer and employee portions of FICA taxes are being calculated correctly.

Payroll software or services like SurePayroll® By Paychex can help automate these steps each pay period.

Penalties and liabilities

Employers are legally responsible for calculating, withholding, and depositing payroll deductions such as federal and state income taxes, Social Security, and Medicare. Failure to deposit withheld taxes can lead to IRS penalties, including the Trust Fund Recovery Penalty (TFRP). Under Internal Revenue Code Section 6672, the IRS can assess the TFRP against a person who was responsible for collecting and paying over withheld taxes and willfully failed to do so. The penalty equals the unpaid trust fund tax: the income tax withheld from employees plus the employees' share of Social Security and Medicare tax.

Mistakes in payroll deductions can also lead to employee dissatisfaction and compliance issues at the state or federal level. Many businesses use a payroll service like SurePayroll to help minimize calculation errors and the compliance risks that come with them.

SurePayroll can help calculate payroll deductions

You set up each employee's withholding and the deductions they've elected, and SurePayroll calculates and deducts them every pay period. SurePayroll also calculates payroll tax withholdings, deposits payroll taxes on your assigned schedule, and files Form 941, Employer's Quarterly Federal Tax Return. Your employees can review each deduction on their own pay stubs through the SurePayroll employee self-service portal.

This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up to date

Related Terms

Nanny Tax

Payroll Run

Self-Employment Tax

Small Business Solutions. Simplified.

You deserve simple solutions from the people who care about your success.

Get started

Frequently Asked Questions

Which payroll deductions are mandatory for employees?

Mandatory payroll deductions include federal income tax withholding based on the employee's Form W-4, Social Security tax at 6.2% of wages up to the annual wage base, Medicare tax at 1.45% of all wages, and any state and local income taxes that apply. Employers must also begin withholding the 0.9% Additional Medicare Tax in the pay period in which an employee's wages for the calendar year pass $200,000, and withhold it on wages above that amount. Wage garnishments, such as child support orders, are also mandatory when a court or agency order is in place.

What is the standard deduction on a paycheck?

The standard deduction is a set amount that reduces taxable income when an individual files their annual tax return; it's not a deduction taken from each paycheck. An employer uses the employee's W-4 to estimate tax withholding, which indirectly accounts for the standard deduction.

How do you report payroll deductions?

Payroll deductions are typically reported on pay stubs and in payroll records, which show gross pay, each deduction amount, and net pay. Employers also report tax withholdings to the IRS and state tax agencies through payroll filings.

Are payroll deductions recorded as liabilities?

Yes. The amounts withheld from employee paychecks are considered short-term liabilities until they're paid to the appropriate agencies, benefit providers, or creditors.

How do pre-tax and post-tax deductions differ?

Pre-tax deductions are taken from an employee's pay before taxes are calculated, lowering taxable income and potentially reducing their tax bill. Post-tax deductions come out after taxes are withheld and do not affect taxable income.

How do payroll tax rates for Social Security and Medicare work?

Employers withhold Social Security tax (6.2%) and Medicare tax (1.45%) from employee wages and pay a matching amount. Social Security tax applies up to the annual wage base, $184,500 for 2026 and $192,300 for 2027, while Medicare tax applies to all wages. Employers must begin withholding the 0.9% Additional Medicare Tax in the pay period in which an employee's wages for the calendar year pass $200,000, and withhold it on wages above that amount. There's no employer match for the Additional Medicare Tax.

Get payroll that’s affordable, easy, and hassle-free.

Start in seconds—and check simple payroll off your list.

Get Started Get Started