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The Small Business Guide To Payroll Deductions

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min read
October 3, 2023

As a small business owner, you’re responsible for making sure your employees get paid. But in addition to paying your employees, you’re also responsible for withholding some of that pay in the form of payroll deductions.

Payroll deductions are subtracted from an employee’s total pay for taxes, garnishments and benefits—and once those deductions are complete, employees are left with their take home pay (more commonly referred to as net pay). Some payroll deductions include social security tax, Medicare tax, state and federal taxes and retirement plan contributions.

If you want to both make sure your employee paychecks are accurate each pay period and that you’re staying on top of any necessary tax withholdings or premium payments for each employee, understanding payroll deductions is a must. There are two different types of payroll deductions—mandatory and voluntary. Let’s take a deeper look at both categories.

Mandatory Payroll Deductions

Mandatory payroll deductions are the deductions you’re required to withhold from your employee’s gross pay before issuing paychecks—and when we say required, we mean required by law.

The payroll deductions that fall under the “mandatory” umbrella? Payroll taxes. As an employer, you’re required to withhold payroll taxes from your employees and submit them to the appropriate tax agencies; failure to do so can lead to serious penalties for your business (not to mention a lot of time, hassle, and headaches).

There are a few different types of tax deductions that are mandatory to withhold from your employee’s pay, including:

Voluntary Payroll Deductions

In addition to mandatory payroll deductions, there are a wide variety of additional withholdings that aren’t mandatory, but you may still need to deduct from your employees’ paychecks. These withholdings are called voluntary payroll deductions.

Voluntary payroll deductions typically cover benefits for your employees. The big caveat with these voluntary deductions? Employees need to opt in—and, as an employer, you need to have their written consent before you start withholding voluntary payroll deductions from their paycheck.

There are a variety of voluntary payroll deductions you may need to withhold from your employees wages, including:

Make Sure You Understand Payroll Deductions To Avoid Penalties

Clearly, there are a variety of payroll deductions you’ll need to withhold from your employees’ gross pay. But as an employer, it’s important to ensure you understand all mandatory payroll deductions you’ll need to withhold for your employees, any voluntary payroll deductions your employees elect to have withheld from their pay, and how much need to be withheld each paycheck. Otherwise, you could find yourself facing steep penalties and issues with your employees, benefit providers, and federal, state, and local governments.

Payroll deductions can be confusing. With Hourly, you don’t have to worry about calculating withholdings; when you process payroll, Hourly automatically calculates any mandatory and/or voluntary payroll deductions for each employee—and withholds the correct amount before issuing paychecks. Want to experience Hourly for yourself? Get started with a free 14-day trial today!

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