Employers are legally obligated to collect portions of employee paychecks for federal income taxes and FICA contributions. Employers are also allowed to withhold funds for optional deductions (e.g. retirement plans and health insurance premiums) when authorized by employees.

The reason that calculating payroll deduction can be so difficult is due to the combination of complex rules that must be followed and the different statuses, options, and regulations related to each user.

Workforce.com simplifies payroll by automating accurate calculations and ensuring the correct deductions are applied every time.

Payroll deductions are amounts taken out of an employee’s paycheck to pay taxes, garnishments or benefits like health insurance. For example, federal and state taxes are done per statute and required by law, but voluntary deductions like retirement savings or supplemental insurance.

These deductions are also classified as pre-tax or post-tax, depending on where they get factored in the payroll process. In this guide, we will define the kinds of payroll deductions, explain how they work and provide some tips to ensure accuracy on every pay period.

Mandatory vs. Voluntary Payroll Deductions

Most payroll deductions are legally required or voluntary. Mandatory withholdings are amounts that employees are required to pay and employers must withhold or deduct. That includes what is known as statutory deductions required by law, such as federal income taxes and Social Security.

Voluntary deductions, on the other hand, are amounts deducted from an employee’s pay with their agreement. This is usually for retirement accounts, health insurance and charitable donations.

Mandatory deductions

Statutory deductions

Payroll statutory deductions refer to employer-held payments that companies have taken out of employee paychecks for tax purposes and to help support government wage programs such as Social Security, Medicare, and individual state-level projects.

The following are the statutory deductions that employers must withhold in order to follow the law:

FICA taxes

FICA taxes are a statutory deduction used to fund Social Security and Medicare.

If you owe taxes, the most expensive estimate is 6.2% for Social Security tax from your salary. The amount could be limited or capped by the earnings an employee make either. For 2025, the wage base limit will increase to $176,100.

It is funded by a Medicare tax of 1.45% on an employee’s wages with no limit. There is additional Medicare tax for those who earn over $200,000 (depending on their filing status). Additional information is available on the Internal Revenue Service (IRS) webpage here.

Federal income tax

Federal income tax is a deduction taken from the salary of all employees. The federal government establishes different rates for deduction on whole salaries as taxes depending on income of an individual. Taxable brackets range from 10% to 37% of your income.

Progressive Federal Income Tax Excluding that, taxes are not computed generally by a percentage on wages.

That is to say, the more an individual earns, the larger do different segments of their income become taxed. E.g. One person has an income of $65,000 this is taxable for them. That employee will be liable for the federal tax under 2025 rates as well:

• 10% on the first $11,925 = $1,192.50
• 12% on the next $36,550 ($48,475 – $11,925) = $4,386
• 22% on the remaining $16,625 ($65,000 – $48,475) = $3,635.50
• Total Tax Liability: $9,214

State and local income taxes

They must also withhold state and local income taxes, based on the location of where their employees work or reside. The way in which they are calculated is different Many states adopt a progressive system like the federal government, while others are at a flat rate or no income tax.

On top of how state income taxes are computed, you have to know about reciprocal agreements when an employee works in one state and lives in another.

Although statutory deductions are carried out according to law; it is necessary to point out that not all workers are bound by these deductions. For example, Social Security and Medicare tax withholdings do not apply to independent contractors.

Should you need clarity on the classification of an employee, the IRS provides assistance with Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This form helps to identify whether a worker is an employee or an independent contractor.

Wage garnishments

Wage garnishments refer to a legal procedure in which an employer is required by court order to withhold earnings from the paycheck of one of their employees for the payment of debt.

Wage garnishment is generally used for child support, but it can also be for other reasons (student loans, tax debts, court judgments on personal debt).

Wage garnishments are determined by the employer, keeping in mind federal and state maximums. Employers are required to enforce the deduction as soon as they receive notice of the garnishment order from the court and let the employee know.

Voluntary deductions

While mandatory deductions are used to finance government programs or meet obligations such as child support payments, deductions of a voluntary nature are discretionary and improve an employees benefits. Common examples include:

Retirement contributions

Employees are free to save an amount for retirement. For example, If offered by their employer, popular options include 401(k) plans and Individual Retirement Accounts (IRAs) that employees can opt into.

Health and welfare benefits

Employees can also have their health insurance premiums taken from their paychecks and those of their dependents. These funds can also be withdrawn with the worker’s permission from a health savings account (HSA).

Supplemental insurance coverage

Supplemental group life insurance, including premium for the extension of coverage, are elective. Employers provide a base plan, but employees can contribute directly from their paycheck for more protection.

Union dues

When a union represents members at work, those workers can give their employers permission to deduct union fees and dues directly from their paychecks.

Savings and investment programs

Employees have the option of making voluntary deductions for their own savings and investment, as in the case of payments for employee stock purchase plans or amounts allocated for direct deposit to savings plans.

Charitable donations

Workers can opt to give part of their wages to charity.

Voluntary deductions allow you to offer benefits and savings plans that are convenient for your employees. Employers, however, must first obtain written permission to process deductions of these kinds for purposes of compliance and transparency.