Which Payroll Deductions are Required by Law?

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By Joshua Meller, Sr. Manager of Accounting Services in the Pacific Zone at 1-800Accountant

Which Payroll Deductions Are Required by Law?

As an employer, you’re likely familiar with payroll deductions that come out of your employees’ checks. However, do you know which payroll deductions are mandatory and which are voluntary? Knowing the difference between the two types of deductions and why they’re essential can help you better understand your payroll. 

What Are Payroll Deductions?

Payroll deductions are amounts withheld from an employee's payroll check, and the employer is responsible for withholding these amounts. Unlike independent contractors and freelancers who need to calculate their own taxes, employees don’t need to track this themselves.

Which Payroll Deductions Are Mandatory?

Employers are required by law to withhold mandatory payroll deductions. If an employer fails to withhold the correct amounts or doesn’t factor in the deductions at all, it could result in a fine or a lawsuit. In some cases, a business can even go under! 

To avoid negative repercussions, employers should pay special attention to mandatory payroll deductions and ensure they’re withholding the correct amounts. Employers who don’t feel comfortable calculating and tracking this themselves should use payroll software or work with an accountant for peace of mind. 

Federal Income Tax

Federal income tax (sometimes appears as Fed Tax, FT, or FWT on paystubs) is typically the most significant deduction you’ll withhold from your employees’ paychecks. Since federal withholding is already paid to the government, your employees don’t have to worry about this when they file their tax returns. 

The amount of money you’ll deduct from payroll in federal income tax depends on a few things:

  • The filing status on the employee’s W-4
  • The number of dependents or allowances specified
  • Other income and adjustments on Form W-4 that your employee filed

It’s crucial that employees accurately fill out their W-4 so you can withhold the correct amount for federal income taxes. 

FICA Taxes

Another mandatory deduction you must withhold is FICA. The Federal Insurance Contributions Act made paying FICA taxes mandatory for most employees and employers. These funds go towards Social Security and Medicare.

FICA tax rates have remained consistent over the past 20 years. Employers and employees split the tax, each paying a 6.2% tax rate for Social Security and 1.45% for Medicare. To calculate your FICA tax liability, multiply the gross pay by 7.65%.

Child Support Payments

Child support withholding, another court-mandated payroll deduction, must be withheld after taxes are withheld. As an employer, you’ll receive a withholding notice if you’re required to make child support deductions from an employee’s wages. Usually, an employee’s disposable income is used to determine the limits of child support deductions.

Local Tax Withholdings

Other mandatory payroll deductions exist, but amounts vary depending on your location. Local tax withholdings often fund education, parks, and community improvement. Local tax withholdings can either be permanent or temporary and used to support a specific project or goal. 

State Income Tax

Most states have mandatory state income taxes. They’re similar to federal tax withholdings, the difference being that state income taxes generally go towards the state budget rather than the federal government. 

Each state’s rates vary. Some states either charge a flat state income tax or use a progressive tax rate in which people with higher taxable incomes pay higher state income tax rates.

The following states don’t collect state income tax:

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

What Are Voluntary Payroll Deductions?

Your employees control voluntary payroll deductions. Voluntary payroll deductions are withheld from every payroll check, bonus, and commission check an employee receives.

Voluntary payroll deductions can include:

  • Health insurance
  • Life insurance
  • Disability insurance
  • Union dues
  • Retirement contributions
  • HSAs and FSAs

Although employees opt into voluntary deductions, it’s your company’s responsibility to ensure these deductions are reflected accurately on the payroll.

When it comes to payroll deductions, it’s crucial that you properly calculate and withhold all deductions to avoid any unnecessary fines or consequences. Working with a professional bookkeeper or accountant can help you ensure that you’re on the right track with your payroll deductions.

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