Payroll Deductions Explained: What Gets Taken Out of an Employee's Paycheck
Employees often wonder why their take-home pay is so much less than their salary. Here's a breakdown of every payroll deduction — mandatory and voluntary — and what employers need to know.
When an employee earns $5,000 in a pay period, they don't take home $5,000. Payroll deductions — both mandatory and voluntary — reduce the net pay. Here's a breakdown of what comes out and why.
Mandatory Deductions
These are required by law and must be withheld from every paycheck.
Federal Income Tax
Withheld based on the employee's W-4 elections (filing status, allowances, additional withholding). The amount varies by income level and withholding elections.
Social Security Tax
6.2% of gross wages, up to the annual wage base ($168,600 in 2024). The employer matches this 6.2%.
Medicare Tax
1.45% of all gross wages (no cap). The employer matches this 1.45%. An additional 0.9% applies to wages over $200,000 (employee only, not matched by employer).
State Income Tax
Varies by state. Texas has no state income tax — a significant advantage for Texas-based employees.
State Unemployment Insurance (in some states)
Some states require employee contributions to state unemployment funds.
Voluntary Deductions
These are elected by the employee and authorized in writing.
Health Insurance Premiums
Employee's share of employer-sponsored health insurance. Often deducted pre-tax, which reduces taxable income.
Retirement Contributions (401(k), SIMPLE IRA)
Employee contributions to employer-sponsored retirement plans. Traditional contributions are pre-tax; Roth contributions are post-tax.
Flexible Spending Accounts (FSA) / Health Savings Accounts (HSA)
Pre-tax contributions to accounts used for medical or dependent care expenses.
Garnishments
Court-ordered deductions for child support, student loans, or creditor judgments. Employers are legally required to comply with garnishment orders.
Pre-Tax vs. Post-Tax Deductions
Pre-tax deductions (health insurance, traditional 401(k), FSA) reduce the employee's taxable income before taxes are calculated. Post-tax deductions (Roth 401(k), some insurance) come out after taxes.
Employer's Matching Obligations
For Social Security and Medicare, the employer pays a matching amount equal to what's withheld from the employee. These employer contributions are a business expense — deductible on your business tax return.
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