Definition of Payroll Deduction

Not all payroll deductions are mandatory; voluntary deductions also exist.

A payroll deduction is typically an amount withheld by the employer from the employees earnings. Taxes, insurance, pension contributions, union and uniform dues, wage assignments and child support orders are all examples of payroll deductions. The government mandates some deductions such as taxes, whilst other deductions such as insurance and pension contributions are voluntary.

Significance

Payroll deductions are an important part of the employee’s paycheck. Just like their earnings, certain deductions must come out of the employees’ paycheck whether they have 1 to 40 hours on a paycheck. If the deductions do not come out of the employees check, then the employer may be liable and responsible for paying for those deductions. If the insurance deductions do not come out, then the employer would have to pay the deduction or cancel the employees insurance through no fault of the employee. It is the employer’s responsibility to ensure that deductions come out in a timely manner.

Types

Income taxes deductions are taxes deducted from the employees’ paycheck and required by the government. Such taxes include Federal, social security, and Medicare taxes. Insurance deductions cover medical, dental and sometimes vision insurance. Pension or 401K deductions are another voluntary deduction, with a 401k deduction, the employee can dictate how much they want to contribute or have deducted from each paycheck. Union dues and uniform deductions are deductions taken out over a period to cover a fixed amount. Other deductions like child support orders and garnishments are court ordered and are typically a percentage of the employee’s salary.

Periods

Voluntary payroll deductions come out of every paycheck that the employee receives excluding special checks like bonus checks. Mandatory deductions such as Federal, Social Security, and Medicare taxes come out of every paycheck that the employee receives. If the employees pay is weekly then deductions will come out weekly, bi-weekly deductions will come out bi-weekly, etc.

Responsible party

It is the responsibility of the payroll department to withhold the correct deductions. Missed deductions are not the responsibility of the employee that is why it is of the utmost importance for the payroll department to verify each voluntary deduction. Mandatory deductions, for instance tax deductions are automatically set up when a company sets up their payroll system and are set to come out of every paycheck whether the employee approves the deduction or not.

Misconceptions

Insurance deductions are not a mandatory deduction. If an employee does not opt in for health or dental insurance, then deductions will not come out of the employees check. Another popular misconception is that Medicare taxes are the same as having Medicare insurance. This is not a true statement.

References

• Definition of a payroll deduction

Resources

• Paycheck calculator