Definition: Payroll deductions, also called payroll withholdings, are amounts withheld from employee paychecks or gross pay by employers. They are called deductions because this is the amount of money deducted from employees’ gross wages. There are many different types of payroll deductions that employees have withheld from their paychecks. Some deductions are voluntary while law requires others.
What Does Payroll Deduction Mean?
Pension contributions, for example, are voluntary and are controlled by the employee. Law requires other deductions, like FICA taxes, so the employee must have these taxes taken out of his or her paycheck.
The concept behind payroll deductions is simple. It’s easier for the employer to take the money out of the employee’s paycheck rather than having the employee set aside the money to pay the tax or contributions by himself. Thus, the employer withholds certain funds from the employee’s gross pay.
There are several different types of deductions. Let’s take a look at a few examples.
Example
FICA taxes or Federal Insurance Contributions Act taxes are taken out of your paycheck by law. This roughly 7.5 percent tax consists of a 6.2 percent social security tax and a 1.45 percent medicare tax. Both of these percentages are have income limits and restrictions, but every employer is required by federal law to withhold these from each other their employees’ paychecks.
Income taxes are also withheld from gross pay. Employees are required to withhold specific amounts depending on their marital status and dependency exemptions. These payments are withheld by the employer and remitted to the IRS on behave of the employee.
Some voluntary deductions include retirement funds like IRA and 401k plans, union dues, medical insurance premiums, and more. All of these deductions can be controlled by the employee and not required by the government.
When an employer withholds these deductions, it credits a payable account until the money is remitted to the proper source. Remember, the money is still the employee’s even though the employer took it out of the employee’s paycheck.
