Payroll deduction

A payroll deduction is an itemized amount withheld by an employer from the gross pay of an employee. A payroll deduction is typically intended to pay taxes, fund a pension, or reimburse the employer for all or a portion of certain expenses incurred on behalf of the employee. Examples of payroll deductions are:

  • Income tax withholding. This amount is forwarded by the employer to the government. The deduction is split into amounts that are withheld on behalf of both the state and federal governments.

  • Social Security withholding. The employer matches this amount and forwards it to the government.

  • Medical insurance. This amount is the employee-paid portion of the cost of medical insurance, which is paid over to the employer.

  • Pension contribution. This amount is forwarded by the employer (sometimes with matching funds) to a third-party pension fund.

  • Union dues. This amount is forwarded by the employer to the union that represents an employee with the employer.

  • Garnishments. These amounts (there may be several) are forwarded by the employer to the applicable government or court that issued a wage garnishment order to the employer.

  • Loan reimbursement. The employee may have borrowed money from the employer, in which case the employer deducts all or a portion of the outstanding loan amount from the periodic wages of the employee.

For many payroll deductions, the employer records the amount in a liability account, where it stays until the employer forwards the funds to a third party. For example, this is the case for income taxes, Social Security, pension contributions, union dues, and garnishments.

Employees usually authorize the amount of each payroll deduction by signing a deduction form. This is not the case for garnishments, where the employer is ordered to make the deductions - irrespective of the wishes of an employee.

Related Courses

Human Resources Guidebook 
Optimal Accounting for Payroll
Payroll Management