A Helpful Guide on Payroll Deductions for Small Business Owners

If you’ve ever run your payroll manually, you know how many different components go into running an accurate payroll. One of the most important components of running your payroll is handling the deductions. There are several different types of payroll deductions and they all are used for different reasons.  It’s important to understand the different types of payroll deductions and how to take the necessary steps to process your payroll accurately and efficiently — as well as ensure you’re in compliance with government payroll regulations.

In order to make this process easier, many businesses are choosing to automate the process by using payroll service providers. Using a payroll provider reduces error and ensures that payments are filed with the proper authorities on time. 

PayWow is an online payroll provider that makes it simple to manage your payroll and complete tasks such as handling payroll deductions. Luckily, with PayWow, we will handle all of your payroll deductions for you. However, it can’t hurt to know about the various types of payroll deductions and to get familiar with what is being taken out of your paychecks. 

Here’s an overview of the most common types of payroll deductions: 

What are payroll deductions? 

Payroll deductions are wages withheld from an employee’s total earnings for the purpose of paying taxes and benefits such as healthcare coverage or retirement plans. These deductions are typically processed each pay period and are based on the applicable tax laws and withholding information supplied by your employees. The amount of taxes you withhold for each employee depends upon their Form W-4 Employee’s Withholding Certificate as well as the state equivalent to the Form W-4 in states that have income tax. 

Payroll Deduction Types 

There are four main types of payroll deductions:

  • Pre-tax Deductions
  • Statutory Deductions 
  • Post-tax Deductions 
  • voluntary Deductions

Pre-Tax Deductions 

A pre-tax deduction is any money taken from an employee’s gross pay before taxes are withheld from the paycheck. So, as in its name, pre-tax deductions are taken out of employee paychecks before taxes. 

Because pre-tax deductions are excluded from gross pay for taxation purposes, they reduce taxable income and the amount of money owed to the government. They also lower your Federal Unemployment Tax (FUTA) and state unemployment insurance dues. 

Typically, pre-tax deductions go toward employee benefits. Common pre-tax deductions include health insurance, life insurance, transportation programs, and some retirement plans (401(k) plan). 

The federal government may change the regulations, rules, and limits regarding pre-tax deductions on an annual basis. PayWow will always provide you with the most updated information so your deductions can be filed accurately.

Statutory Deductions

Federal, state, and some local taxes are withheld from an employee’s pay on each paycheck to pay for public programs and services. These withholdings include federal income tax, state income tax (in states where it’s required) any applicable local taxes (city, state, or municipality level), and employee’s share of FICA (Medicare and Social Security taxes). With PayWow by your side, you don’t have to worry about these mandated tax payments. We will take care of them for you and ensure they are submitted on time! 

Federal Income Tax: 

Federal income tax is calculated based on your employees’ Form W-4 information as well as their gross pay. You can use the income tax withholding tables in the IRS’s Publication 15-T to calculate the amount withheld from an employee’s paycheck. Federal income taxes go toward public services such as transportation, education, and the military.

State and Local Taxes:

State income tax laws vary state by state. Some charge a fixed rate against all income, others have multiple tax brackets, and a few charge no income tax at all. Like federal taxes, state and local taxes go toward public services.

FICA Tax: 

Federal Insurance Contributions Act (FICA) tax is made up of Social Security and Medicare taxes. Both the employee and employer contribute to FICA tax equally. Social Security tax is 6.2% of an employee’s income if it is at or below the Social Security wage base. Medicare tax is 1.45% of the employee’s Medicare taxable wages. The total deduction for FICA is 7.65% from an employee’s paycheck. As the employer, you must also pay a 7.65% contribution.

FICA taxes cover public care. Social Security goes toward those who are retired, disabled, or to the families of the deceased. Medicare pays for hospital-related benefits like hospice care and home health care.

Post Tax Deductions 

A post-tax deduction is money that is taken out of your employee’s paycheck after all applicable taxes have been withheld. Post-tax deductions have no effect on an employee’s taxable income. Employees may decline to participate in all post-tax deductions except for wage garnishments. 

A wage garnishment is when a portion of an employee’s salary gets taken out to pay an outstanding debt. Wage garnishments orders will be issued to employers who need to withhold a portion of an employee’s post-tax or net wages to cover unpaid taxes, child support, alimony, or defaulted loans. 

Common post-tax deductions include disability insurance, union dues, wage garnishments, and some Roth IRA retirement plans. 

Voluntary Deductions 

Voluntary deductions are deductions that employees may choose to have taken out of their paycheck to cover the cost of various benefits. Because voluntary deductions are optional, it is important that your employees are aware of them. Certain types of voluntary deductions include health insurance, group-term life insurance, retirement plans, and job-related expenses.  


This was a lot of information, we know. But not to worry, you don’t have to handle your payroll deductions alone! When you use an online payroll provider such as PayWow, we will handle all of the deductions for you. PayWow will ensure your payroll process is simple, accurate, and tax compliant. Start using PayWow today and take advantage of all of our awesome payroll benefits. 

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