Guide to Payroll Deductions: Post-Tax, Pre-Tax, & FAQs

Seeing over 30% of your paycheck being used before it hits your bank account is not only discouraging, it also complicates your ability to plan personal finances each month.

Which is why understanding the difference between your gross pay, the deductions taken from it, and the resulting net pay can have such a big impact – not just in anticipating specific amounts, but also in knowing where those amounts are going in case you want or need to make any adjustments where possible. For example, if you don't like how much you're paying in taxes each month and want to stretch your gross earnings further, you could increase how much you're putting into retirement savings.

In this article, we'll explore what payroll deductions are, address the most common types, and answer some frequently asked questions about them.

What are Payroll Deductions?

Payroll deductions are portions of an employee's wages that are subtracted from said wages to make required payments, such as taxes, and voluntary investments, such as retirement savings or health insurance. These deductions are the primary factor that differentiates an employee's gross pay (the total wages an employee earns in a pay period) from her or his net pay (the total wages actually deposited into the employee's account).

Tax deduction calculations can vary based on the location where employees work, the information employees provide on certain tax documents (like their W-4s), and how frequently the business processes payroll for those employees. For example, different states impose different amounts in income taxes, and some cities even have local taxes as well.

Ultimately, organizations can choose to make these calculations manually or via automated platforms, but deductions are always a part of the payroll process.

What are the Different Types of Payroll Deductions?

While the two main types of payroll deductions are those made voluntarily by an employee and those made for mandatory requirements (i.e., Involuntary Deductions), such as tax laws, court orders, etc., the timing of a deduction is also important. Payroll deductions made before taxes are taken out (aka pre-tax deductions) have the advantage of reducing your taxable income, while those made after taxes (aka post-tax deductions) don't. Post-tax deductions, though, may still have other advantages.  

Mandatory Deductions

Taxes

Perhaps the most widely recognized type of mandatory deductions are federal and state payroll taxes, even though most states technically consider them to simply be taxes instead of "deductions." At the federal level, the biggest deductions go towards Social Security and Medicare taxes, which were originally created by the Federal Insurance Contributions Act (FICA) in the 1930s.

The rates for these taxes in 2024 are 12.4% for Social Security and 2.9% for Medicare. However, these taxes are a shared responsibility between employees and their employers. So, on each paycheck, employees will see only 6.2% of their wages deducted for Social Security on the first $168,600 of their annual wages and 1.45% deducted for Medicare.

Employees who make more than $200,000 annually will also see an additional Medicare tax (at a rate of 0.9%) deducted from their paychecks. Unlike the standard tax for Medicare, this is not shared by employers.

Taxes for unemployment insurance programs are funded solely by employers at the federal level and in most states, but there are some states (Alaska, Pennsylvania, and New Jersey) where employees are required to pay unemployment taxes for the state's unemployment programs. As such, employees in those states will see an additional deduction on their paychecks for State Unemployment Insurance (SUI).

Income taxes at the federal, state, and local levels are paid solely by employees, but employers still use payroll deductions to collect the necessary amounts and remit them to the correct agencies on each employee's behalf. As mentioned above, the rates for these taxes will vary.

For example, certain states (Alaska, Florida, Nevada, New Hampshire, Tennessee, Texas, S. Dakota, Washington, and Wyoming) don't have income taxes at all, while other areas (e.g., New York City) have both state and local income taxes. Moreover, if an employee earned between $103,275 and $129,163 in 2024 and is filing as a single taxpayer (instead of married, head of household, etc.), they'll pay a substantially higher rate in federal income tax (32%) than a similarly filing employee who earned between $30,875 and $57,563 (22%).

Garnishments

Wage garnishments are mandatory deductions resulting from a court order or governmental agency that typically apply to a specific employee. Garnishments are normally used to pay off a debt the employee owns, such as unpaid taxes, defaulted student loans, alimony, or child support. Similar to income taxes, employers use payroll deductions to collect and remit the required amounts on the employee's behalf.

Voluntary Deductions

Unlike mandatory deductions, voluntary deductions are completely optional for employees and usually for benefits or an investment. This is especially advantageous when the deductions are made before the taxes described above are paid.

Pre-tax deductions not only reduce the overall income taxes an employee pays, they also allow more of the gross wages to go towards the employee's investments. The most common types of pre-tax deductions are:

• Health insurance premiums for benefits such as medical, dental, and vision insurance
• Savings accounts, like Flex Spending Accounts (FSAs), used to pay for medical expenses, prescriptions, parking fees, etc.
• Retirement savings, like a traditional 401k, which are often matched to an extent by employers

While not as tax-advantageous, there are several post-tax deductions employees can voluntarily choose. The most common types are for:

• Life insurance policies for supplemental coverages or dependents
• ROTH 401(k) savings
• Job expenses, such as for uniforms or union dues

Frequently Asked Questions About Payroll Deductions

What are payroll deductions?

Amounts subtracted from an employee's gross income to pay for mandatory requirements, such as taxes or garnishments, and voluntary benefits, such as retirement savings or health insurance.

What are some examples of payroll deductions?

Mandatory deductions can include:

• Social Security and Medicare taxes
• Income tax
• Child support payments

Voluntary deductions can include:

• Dental insurance premiums
• 401k contributions
• FSA deposits

Can there be incorrect payroll deductions?

It is possible for an employer to incorrectly deduct an amount from an employee's wages, and such errors can be extremely costly for organizations. For example, if a company accidentally makes a deduction for federal unemployment taxes, that withholding would be illegal as employers are supposed to pay those taxes themselves.

Automated Payroll Deductions and Services

Calculating and organizing payroll deductions manually can be an extremely time consuming and tedious process, especially for larger companies with hundreds (or even thousands) of employees. This leaves open room for all kinds of simple mistakes and human errors.

That's why an automated platform like Paylocity's can be so helpful, especially for payroll deductions and garnishments. Our robust platform takes all the stress out of payroll processing and is available wherever you need via the Paylocity Mobile App. Take the guesswork out of understanding your paycheck by requesting a demo today!