What is a payroll deduction?

Payroll deductions  are wages deducted from an employee's pay to pay for  taxes, benefits  or  deductions . There are both mandatory and voluntary payroll deductions. The order in which deductions are made from a paycheck also matters because some are made pre-tax and some are made post-tax.

Which pay cuts are mandatory?

The law requires employers to withhold the following pay deductions before releasing an employee's pay:

Federal income tax

Federal income tax  applies to wages, cash gifts from employers, tips, gambling income, bonuses and unemployment benefits, and is deducted from the pay of all U.S. workers (unless you qualify for an exemption due to low income).

State and local income taxes

State and local income taxes depend on the state in which the employee receives his or her income – not the state in which the employer is headquartered. As of 2020, the following states do not have income tax payroll deductions:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming.

New Hampshire and Tennessee do not tax wages, but do tax investment income and interest.

State unemployment insurance

State unemployment insurance  applies only to wage earners in Alaska, New Jersey, and Pennsylvania.

Court-ordered garnishments and payments to creditors

These may be needed to pay off overdue debts, including:

• Delay in child support payments
• unpaid federal or state taxes
• Defaulted Student Loans
• Alimony
• Various other monetary penalties.

Social Security and Medicare

These contributions are assessed as a percentage of your income.  Social Security  is 6.2% of income, and Medicare is 1.45%.

Which pay cuts are voluntary?

Employers are not required by law to make voluntary pay cuts, but many choose to do so because they are often helpful to either the employee or the employer. Voluntary pay cuts can include:

• Health, life and disability insurance payments
• Union Dues
• Retirement or  401(k)  contributions (Roth 401(k) contributions are after-tax)
• Flexible spending account  (pre-tax) or  health savings account  contributions