FAQ
What are payroll deductions? Pre-tax & post-tax
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Last updated: June 17, 2026
Payroll deductions are the amounts withheld from employee compensation to cover taxes, benefits and other obligations. These withholdings reduce take-home pay and may be legally required, like income taxes, or optional, like health insurance or retirement contributions.
Additionally, some deductions are withheld before taxes (pretax), which can lower taxable income. Others are deducted after taxes (post-tax) and do not affect tax liability.
Payroll deductions key takeaways:
- Pretax deductions are more advantageous than post-tax deductions because they lower taxable income.
- Mandatory deductions include but are not limited to Federal Insurance Contribution Act (FICA) taxes, state and local taxes, and wage garnishments.
- Voluntary deductions require employee authorization and often cover benefits, such as health insurance or retirement savings plans.
- Tax laws, court orders and employee withholding certificates dictate the process for calculating payroll deductions.
Table of Contents
Payroll deduction basics
Why do payroll deductions exist?
The answer is two-fold. Primarily, payroll deductions are used to help fund government assistance programs, like Medicare, Social Security and in some states, unemployment insurance and disability.
The secondary purpose of payroll deductions is to make benefits more affordable and accessible to employees. The amount withheld from their wages for group health coverage is usually cheaper than what they would pay independently in the insurance market.
How are payroll deductions classified?
Payroll deductions can be classified in one of four ways:
- Pretax
- Post-tax
- Statutory
- Voluntary
Some overlap exists within these categories. For example, a pretax benefit, like group health insurance, can also be a voluntary benefit.
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Pretax deductions
Pretax deductions are taken from an employee’s paycheck before any taxes are withheld. Examples include:
- Group health insurance
- Group term life insurance
- Retirement savings plans, such as 401(k)
- Health savings accounts (HSAs)
- Flexible spending accounts (FSAs)
- Commuter benefits
These benefits must meet IRS requirements for Section 125 cafeteria plans before they can be deducted on a pretax basis. The IRS also limits how much employees can annually contribute to benefits pretax.
Pretax deductions and taxable income
Because they are withheld from gross pay before taxation, pretax deductions reduce taxable income and the amount of money employees owe to the government. They also lower the employer’s federal unemployment and state unemployment insurance dues.
Post-tax deductions
Post-tax deductions are taken from an employee’s paycheck after all required taxes have been withheld. Since they reduce net pay rather than gross pay, post-tax deductions don’t lower the individual’s overall tax burden. Common examples include:
- Roth IRA retirement plans
- Union dues
- Charitable donations
- Wage garnishments
Employees can decline to participate in all post-tax deductions except wage garnishments.
Wage garnishments
Courts, regulatory agencies and the IRS may order employers to withhold a portion of an employee’s post-tax or net wages to cover unpaid taxes, child support, alimony or defaulted loans. The types of income that can be garnished include:
- Hourly wages
- Salaries
- Commissions
- Bonuses
- Pensions and retirement plan payments
The garnishment order will typically specify the withholding amount or percentage of withholding and where to send payment. Employers must read and understand these documents carefully. If they deduct garnishments incorrectly or fail to pay them entirely, the business could be liable for the back payments, not the employee.
In addition to the garnishment order itself, employers must abide by Title III of the Consumer Credit Protection Act (CCPA). This law restricts how much of an employee’s wages can be garnished per week and prevents employers from firing employees if their pay is garnished for any one debt.
Pretax vs. post-tax payroll deductions
The table below compares common payroll deductions based on whether they reduce taxable income or are voluntary.
| Deductions | Reduce Taxable Income | Voluntary |
|---|---|---|
|
401(k) retirement plan (pretax) |
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Charitable donations (post-tax) |
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Commuter benefits (pretax) |
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Group health insurance (pretax) |
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Group term life insurance (pretax) |
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HSA (pretax) |
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FSA (pretax) |
|
|
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Roth retirement plan (post-tax) |
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Union dues (post-tax) |
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Wage garnishments (post-tax) |
Statutory deductions
Statutory deductions are mandated by government agencies to pay for public programs and services. They consist of federal income tax, Federal Insurance Contributions Act (FICA) tax (Medicare and Social Security) and state income tax.
FICA taxes
FICA taxes support Social Security and Medicare. Employees pay Social Security tax at a rate of 6.2% with a wage-based contribution limit and they pay Medicare tax at 1.45% without any cap. This equals 7.65% in FICA taxes per paycheck (until the Social Security wage base is reached), which employers are legally obligated to match.
Some employees may also be subject to Additional Medicare tax. Starting with the pay period in which an individual’s earnings exceed $200,000, employers must begin deducting 0.9% from that person’s wages until the end of the year. Additional Medical Tax also applies to certain levels of railroad retirement compensation and self-employment income. Employers are not required to match this deduction.
Federal income tax
The federal government has seven income tax brackets, ranging from the 10% marginal rate to 37%. These rates are applied progressively, which means that an employee’s wages are first charged at the lowest rate until they reach that bracket’s threshold. They continue to be charged at each subsequent rate until they reach their total gross income or the highest tax bracket.
The taxable income in each bracket varies depending on the individual’s filing status – single or married filing separately, married filing jointly, or head of household – which is noted on Form W-4. Yearly adjustments for inflation by the IRS will also determine the tax bracket thresholds.
To withhold federal income tax each pay period, employers generally have two options – the wage bracket method or the percentage method – both of which can be found in IRS Publication 15-T.
State and local taxes
State income tax laws vary widely, ranging from simple to complex. Some charge a fixed rate against all income, others have multiple tax brackets and a few charge no income tax at all. Still others follow the federal tax code instead of creating their own. For these reasons, employers should consult with all the state governments they operate in to make sure their payroll complies with local regulations.
Voluntary deductions
Employees may choose to have more money taken out of their paycheck to cover the cost of various benefits. These withholdings are known as voluntary payroll deductions and they can be processed pretax (if allowed under section 125) or post-tax. Examples include:
- Health insurance
- Group term life insurance
- Retirement savings plans
- Job-related expenses
Because voluntary deductions are optional, employers must obtain written consent before withholding insurance premiums or any other benefit from employee compensation. They should also display the current deduction and the year-to-date total on every pay statement and keep accurate records in case an employee or auditor questions a deduction. Many states require this disclosure as part of their recordkeeping regulations.
Health insurance
Offering medical, dental and vision coverage to employees is a great way to improve retention and attract new talent, but the cost shouldn’t be burdensome. It’s usually more advantageous for both employers and employees to pay insurance premiums on a pretax basis. To do so, the IRS requires the contributions to go to a section 125 plan.
Group-term life insurance
Some employers make basic term life insurance available to their employees at no additional cost up to $50,000 of coverage. Anything more than this will result in imputed income. If employees want to add supplemental coverage or purchase life insurance for a dependent, employers typically deduct these funds from their pay on a post-tax basis.
Retirement plans
Employers offer many different retirement saving options, but two of the most popular are 401(k) and Roth Individual Retirement Accounts (IRA). Employee contributions to a 401(k) are usually processed pretax, whereas IRA contributions are withheld on a post-tax basis.
Job-related expenses
If employees are unionized, they’ll likely have to pay for their membership and any taxable benefits offered through the union. Other types of job expenses that can be deducted from payroll include uniforms, meals and travel. Some states, however, may prohibit these kinds of deductions.
How do payroll deductions work?
Payroll deductions are generally processed each pay period based on the applicable tax laws and withholding information supplied by employees or a court order. The calculations can be done manually or employers can automate the process using a payroll service provider. Many businesses choose automation because it reduces errors and ensures that payments are filed with the proper authorities on time.
The amount withheld for each employee depends upon the individual’s Form W-4 Employee’s Withholding Certificate, state and local withholding certificates, benefit selections and other details. The place(s) of business and where employees perform services also play a factor in payroll deductions because not every state collects income tax.
How to calculate payroll deductions
- Adjust gross pay by withholding pre-tax contributions to health insurance, 401(k) retirement plans and other voluntary benefits.
- Refer to the employee’s Form W-4 and the IRS tax tables for that year to calculate and deduct federal income tax.
- Withhold 7.65% of adjusted gross pay for Medicare tax and Social Security tax, up to the wage limit.
- Deduct 0.9% for Additional Medicare tax if year-to-date income has reached $200,000 or more.
- In states that charge income tax, withhold it according to the instructions found in each state’s employer’s tax guide or tax code.
- Subtract garnishments, contributions to Roth IRA retirement plans and other post-tax dues to achieve the total net pay.
With ADP’s software, payroll calculation and deductions are handled for employers.
How payroll deductions affect take-home pay
Payroll deductions constitute the difference between gross pay and net or take-home pay. The more that an employer withholds for taxes, benefits or garnishments, the lower the employee’s take-home pay. Instructing employees about all the applicable deductions can help them estimate their net pay each pay period and better manager their finances.
Learn more about gross to net pay calculations
Payroll deductions calculator
Use the ADP payroll deductions calculator to estimate your hourly or salaried employees' take-home pay.
Common payroll deduction mistakes
Payroll deductions can be challenging without the assistance of a payroll service provider. Below are the most common mistakes that occur when businesses attempt to process payroll on their own:
- Withholding pretax contributions to benefits that don’t meet section 125 requirements
- Miscalculating statutory tax deductions or filing them after the appointed deadline
- Processing voluntary deductions without first obtaining written authorization from employees
- Failing to respond to wage garnishment notices or processing them incorrectly
Payroll deduction authorization form
People who owe back taxes to government agencies may request additional payroll deductions to satisfy their debt. IRS Form 2159, Payroll Deduction Agreement must be completed for this purpose. The form also serves as confirmation that the employer will be sending payments to the IRS on the employee’s behalf according to a specific frequency.
Frequently asked questions about payroll deduction
Knowing when and how to make payroll deductions isn’t always easy and mistakes can be costly. Our frequently asked questions can help you avoid compliance violations.
What are examples of incorrect payroll deductions?
Incorrect payroll deductions are often the result of employers charging their employees for benefits and services that they should be paying themselves. This includes:
- Federal unemployment tax (FUTA)
- State unemployment tax
- Workers’ compensation insurance
- Personal protective equipment required by OSHA
- Tools necessary to perform work
There may be additional restrictions at the state level on withholding income to cover uniforms, cash register shortages and job-related expenses.
What are payroll deductions for insurance?
Many Americans who have health insurance purchase it through their employers via payroll deductions. This offers considerable cost savings because the premiums can be withheld from their wages on a pre-tax basis under a Section 125 plan. In actuality, however, employees are not paying for their health coverage directly, but are reimbursing their employer, who submits payment to the health insurance provider.
How are payroll deductions reported?
When reporting employee tax withholdings and filing the required employer tax payments to the federal government, you typically use the following forms:
- Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
- Form 941, Employer’s QUARTERLY Federal Tax Return
- Form 944, Employer's Annual Federal Tax Return
These documents can be submitted via paper or e-file. Individual states have their own guidelines for reporting payroll deductions, so it’s important to check with your local authorities.
What are examples of payroll deductions?
Payroll deductions fall into four different categories – pretax, post-tax, voluntary and mandatory – with some overlap in between. For instance, health insurance is a voluntary deduction and often offered on a pretax basis. Specific examples of each type of payroll deduction include:
- Pre-tax deductions: Medical and dental benefits, 401(k) retirement plans (for federal and most state income taxes) and group-term life insurance
- Mandatory deductions: Federal and state income tax, FICA taxes, and wage garnishments
- Post-tax deductions: Garnishments, Roth IRA retirement plans and charitable donations
- Voluntary deductions: Life insurance, job-related expenses and retirement plans
What is the LTD deduction on paychecks?
The long-term disability (LTD) deduction covers a percentage of wages for employees who are injured or too sick to work for an extended period of time. When LTD is deducted pre-tax, employees pay slightly less for premiums, but are charged federal income tax on any benefits received. Post-tax LTD deductions, on the other hand, result in employees receiving slightly less take home pay each pay period, but their benefits aren’t subject to any further tax if they use them. Short-term disability (STD) is often taxed in the same manner.
How often do payroll deduction rules change?
Some payroll deduction rules, such as the Social Security wage base, are adjusted annually for inflation. Others change only with the passage of new legislation, like the One Big Beautiful Bill Act (OBBA). Employers struggling to keep pace with evolving regulations can turn to payroll providers for compliance assistance.
Can employees opt out of all deductions?
Employees generally can only opt out of voluntary payroll deductions, such as contributions to group health insurance and retirement savings plans. Wage garnishments are mandatory, as are tax deductions, unless the employee qualifies for tax exempt status.
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This guide is intended to be used as a starting point in analyzing an payroll deductions and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
