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Types of Payroll Deductions & Withholdings

Personal Finance
Man researching types of payroll deductions at home over coffee

You get your paycheck, but there's a big difference between your gross and net earnings. Taxes and different types of payroll deductions account for this part. If you're unsure of what these deductions are and how they affect your take-home pay, here's some information to keep in mind.

Federal & State Income Taxes

Your employer withholds taxes from every paycheck. Federal and state taxes, which are used to fund public services like infrastructure and education, are taken out of your gross income and determined by how you fill out your W-4 form.

Your tax filing status, tax bracket and taxable income, which is the amount of your income that's subject to tax after you've taken any allowable deductions and exemptions, all affect how much federal tax you pay. Most people pay federal income tax unless their income is low and the deductions and credits available to them wipe out their tax liability. If you live in a state with no state income tax, then you won't see a state payroll withholding.

Social Security

You'll also see a line item on your paycheck for Social Security or Federal Insurance Contributions Act (FICA) taxes. Your employer withholds 6.2% of your gross pay up to $147,000 for Social Security, according to the Social Security Administration (SSA).

You pay into Social Security throughout your working years. Beginning at age 62, you can start collecting benefits based on what you've contributed to Social Security taxes. If you collect benefits before your full retirement age, defined by the year in which you were born, your monthly benefit will be reduced.

Medicare Tax

This payroll deduction, which is also grouped into FICA taxes on your paycheck, is used to fund the federal health care program for seniors. Your employer is required by federal law to:

  • Withhold 1.45% of your income in taxes to pay into the program, according to the IRS.
  • Pay 1.45% to the federal government
  • Total = 2.9%.

If you make more than $200,000 in a calendar year, there is a .9% Additional Medicare Tax.

Similar to Social Security, you can begin to receive Medicare benefits once you reach a certain age. You'll be eligible for Medicare once you turn 65.

Retirement Deductions

All of the items above are mandatory deductions, but you also can take voluntary deductions. Retirement deductions fall into this category.

If you have a 401(k) or 403(b) through work, your employer may withhold part of your pretax income to deposit into these retirement plans based on your election to contribute or if there is an automatic deferral provision. Some retirement plans also have a Roth account type available, which would have you pay taxes on your contributions as you make them rather than when you withdraw the money in retirement. These taxes will also be deducted from your paycheck.

In either case, you likely determine the percentage of your income to contribute. For 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan, according to the IRS. Your employer is not responsible for withholding income for any individual retirement accounts (IRAs) you might hold.

Insurance Policy Deductions

If you have employer-sponsored health, dental or vision insurance, you'll pay for your monthly premiums via a payroll deduction. Your employer will likely deduct the required amount and send that payment to your insurance company directly.

If you have voluntary benefits like life insurance, a flexible spending account or a pretax health savings plan to pay for out-of-pocket health care costs, you'll also contribute to these plans via a payroll deduction.

Other Payroll Deductions & Withholdings

Depending on your personal situation, you may encounter additional deductions and payroll withholdings. Some of these can include wage garnishments for child support, union dues or payments for back taxes you owe.

Payroll Deductions & Your Take-Home Pay

The different types of payroll deductions are more than just line items on your paycheck. Many of them are used to fund a variety of public services and federal programs like Social Security and Medicare.

Next time you see things like FICA or federal and state income taxes on your pay stub, you'll likely have a better understanding of where your money goes and why.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.