Payroll deductions aren’t just a line on a paycheck—they determine what employees take home and keep companies compliant. Taxes, benefits, and voluntary contributions all come out of gross pay before the net amount hits a bank account. For employers managing both domestic and international teams, knowing how to calculate deductions properly makes payroll smoother and builds employee trust.
In this guide, we’ll break down the types of payroll deductions and show how they’re calculated, and highlight the factors that shape the final paycheck.
What are payroll deductions, and how do they work?
Payroll deductions are the amounts taken out of an employee’s pay before they see their final paycheck. These withholdings are what separate gross pay from net pay—the money that actually reaches an employee’s account. Common deductions include:
- Taxes: Federal, state, and local income taxes, plus Social Security and Medicare.
- Benefit premiums: Employee contributions for health, dental, vision, or other coverage.
- Retirement savings: Contributions to accounts such as a 401(k).
- Union dues: Payments required under a union agreement.
- Court-ordered payments: Garnishments for child support, alimony, or other legal obligations.
- Charitable donations: Voluntary contributions to nonprofits through payroll, if offered.
To calculate payroll, employers start with gross wages, subtract pre-tax items, and withhold mandatory taxes. Each amount must be accurate and sent to the proper agency or provider. Payroll software can streamline this process, but it’s still critical to keep information up to date and ensure payments go out on time.
Types of payroll deductions
Most paychecks share a mix of required and optional withholdings. Some cover government taxes, others pay for benefits or savings plans, and a few depend on individual choices. Here are the main types you’ll see:
Mandatory payroll deductions:
- FICA taxes: In the U.S., these fund Social Security and Medicare programs, providing retirement, disability, and health insurance benefits to eligible individuals. Most countries have similar programs. Typically, both team members and employers contribute to FICA taxes, which are calculated as a percentage of the team member's gross earnings.
- Federal income tax: This is withheld based on the team member’s Form W-4 and the IRS tax tables.
- State, local, and other regional taxes: These taxes vary widely. Some states use progressive taxes, some use flat tax rates, and some don’t levy income taxes at all. Specific regions may require further deductions, like contributions to a disability insurance program.
Voluntary payroll deductions
- Health insurance: Many team members participate in employer-sponsored health plans, with monthly premiums taken out of their paychecks.
- Retirement plan contributions: Team members can choose to contribute to employer- and government-sponsored retirement plans, such as 401(k)s or IRAs, using payroll deductions.
- Life insurance: Employers may offer basic life insurance coverage with the option for team members to purchase additional coverage for themselves and their dependents via deductions.
- Job-related expenses: Union dues or the cost of uniforms may sometimes be deducted from a team member's pay, depending on legal regulations and the employer's policies.
Pre-tax deductions:
- Traditional 401(k) contributions: Team members make voluntary contributions to 401(k) retirement plans with pre-tax dollars.
- Health Savings Account (HSA) contributions: Team members with high-deductible health plans can contribute pre-tax dollars to an HSA to cover qualified medical expenses.
- Dependent Care Flexible Spending Account (DCFSA) contributions: Team members can set aside pre-tax funds to pay for eligible dependent care expenses, such as daycare or preschool.
Post-tax deductions:
- Charitable donations: Some employers offer programs that allow team members to make post-tax contributions to qualified charitable organizations directly from their paychecks.
- Union dues: Team members who are part of a labor union may have these fees deducted from their paychecks.
- Roth 401(k) contributions: These are voluntary contributions made with post-tax dollars to a retirement savings account. While they don't immediately reduce taxable income, qualified withdrawals in retirement are tax-free.
- Wage garnishments: These are court-ordered deductions from a team member's net pay for reasons such as child support, alimony, or debt repayment.
How to calculate payroll deductions
Every deduction process follows the same flow: you start with gross pay, subtract withholdings, and end up with net pay. Here’s how it works in practice:
- Calculate gross pay based on the team member’s salary, hourly rate, or other compensation arrangement.
- Subtract pre-tax deductions, such as traditional 401(k) contributions and health insurance premiums. (Again, this often reduces the team member’s taxable income.)
- Withhold mandatory taxes, such as FICA taxes and federal, state, and local income taxes.
- Deduct post-tax items, such as wage garnishments or charitable donations.
- Determine net pay, which is the final amount of money the team member receives after all deductions.
What can complicate payroll deductions?
Even with a solid process in place, certain variables can throw payroll off course. Here are some of the most common factors that complicate deductions:
- Team members with multiple jobs: When a team member works more than one job, each employer must withhold taxes separately. The team member may need to coordinate their withholdings across all their jobs to ensure enough taxes are withheld throughout the year.
- Significant life events: Milestones like getting married, having a child, or starting a second job impact a team member’s tax liability and, consequently, the amount that needs to be withheld from their paychecks. Team members should promptly update their W-4 and other relevant tax documents when such events happen to avoid complications.
- Supplemental wages and bonuses: Special withholding rules often apply to supplemental wages such as bonuses, commissions, and overtime pay. In the U.S., employers can opt to withhold taxes on supplemental wages at a flat rate or add the supplemental wages to the team member's regular wages and withhold taxes using the standard tax tables.
Payroll deductions outside the U.S.
While the basics of payroll are similar everywhere, each country has its own rules and required contributions. From retirement funds to social insurance programs, these deductions reflect how different governments support workers. Here are a few examples from around the globe:
- Australia's Superannuation Guarantee requires employers to contribute 10.5% of an employee's earnings (set to rise to 12% by 2025) into a superannuation fund that ensures retirement savings.
- Brazil’s Contribution to the National Social Security Institute (Contribuição para o Instituto Nacional do Seguro Social) is a mandatory payroll deduction that funds pensions, sickness and maternity benefits, and other social welfare programs, with rates based on income.
- Germany’s Solidarity Surcharge (Solidaritätszuschlag), an income tax introduced in 1991 after the fall of the Berlin Wall, finances the costs of integrating the former East Germany and rebuilding its infrastructure after German reunification.
- India's Provident Fund, a government-backed retirement savings initiative, mandates employees to allocate 12% of their earnings; employers equally match their contributions.
- South Africa’s Unemployment Insurance Fund (UIF), funded by employer and employee contributions, provides short-term relief to workers who become unemployed or cannot work due to maternity, adoption leave, or illness, ensuring a safety net for individuals who are unable to earn an income temporarily.
- The United Kingdom’s National Insurance, funded by payments from workers and employers, supports state benefits like pensions, unemployment benefits, and healthcare, with rates depending on income and job status.
Simplify global payroll with Oyster
Payroll deductions may look small on a paycheck, but they play a big role in making sure employees get paid correctly and businesses stay compliant. You start with gross pay, subtract taxes and benefits, and end with net pay. Add in global requirements, and the process quickly becomes more complex.
That’s where Oyster can help. Pay team members in 140+ currencies, stay compliant with local laws, and deliver paychecks on time—every time. It’s a smarter way to manage international payroll and gives you the freedom to grow your team anywhere in the world.
Need help simplifying global payroll? Book a demo today and see how Oyster makes it seamless.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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