What Are the Two Types of Payroll Deductions?

Payroll deductions are amounts subtracted from an employee’s total earnings before they receive their net pay. These withholdings fund government programs and contribute towards employee benefits. Understanding these deductions helps clarify how gross pay transforms into the actual amount received.

Pre-Tax Deductions

Pre-tax deductions are amounts withheld from an employee’s gross pay before income taxes are calculated. This process reduces an employee’s taxable income, which can lead to a lower overall tax liability. The federal government, along with state and local authorities, mandates certain pre-tax withholdings.

Federal income tax withholding estimates an individual’s annual income tax liability, adjusted based on Form W-4 information. State and local income taxes, where applicable, are also deducted before federal tax calculations. These vary significantly by geographic location.

Federal Insurance Contributions Act (FICA) taxes include Social Security and Medicare. Social Security is withheld at 6.2% of wages for employees, up to an annual wage base limit. Medicare is withheld at 1.45% of all wages, with no wage base limit.

Beyond mandatory taxes, certain employer-sponsored benefit contributions are pre-tax. These include health insurance premiums, contributions to Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs). Contributions to traditional retirement plans, such as a 401(k) or 403(b), also qualify as pre-tax deductions, lowering current taxable income, though they remain subject to FICA taxes.

Post-Tax Deductions

Post-tax deductions are amounts subtracted from an employee’s pay after all applicable income taxes and pre-tax deductions have been calculated and withheld. Unlike pre-tax deductions, these withholdings do not reduce an employee’s taxable income. They are used for specific benefits, services, or obligations.

One common example is contributions to a Roth 401(k), where funds are contributed after taxes, allowing for tax-free withdrawals in retirement. Wage garnishments are legally mandated post-tax deductions, compelling employers to withhold a portion of an employee’s earnings to satisfy debts. These can include child support obligations, defaulted student loans, or other court-ordered judgments.

The amount withheld for garnishments can vary based on the type of debt and applicable federal and state laws. Consumer debt garnishments are limited to 25% of disposable earnings, or the amount by which weekly wages exceed 30 times the federal minimum wage, whichever is less. Child support garnishments can be higher, ranging from 50% to 65% of disposable income.

Other common post-tax deductions include union dues. Employees may also elect to have charitable contributions deducted directly from their pay. Certain insurance premiums, such as for supplemental life insurance or disability insurance, might also be post-tax deductions.

Understanding Your Pay Stub

Reviewing a pay stub provides a detailed breakdown of earnings and deductions, explaining how gross pay translates into net pay. Pay stubs display the pay period dates, the total gross earnings for that period, and year-to-date totals. This allows employees to track their earnings over time.

The deductions section of a pay stub lists all amounts withheld, categorizing them into taxes and other deductions. Federal, state, and local income tax withholdings are itemized, along with FICA taxes for Social Security and Medicare. Each deduction has a specific code or abbreviation, which can be clarified by consulting with an employer’s human resources or payroll department.

Pre-tax deductions, like health insurance premiums or traditional retirement contributions, are shown separately from post-tax deductions, such as Roth 401(k) contributions or wage garnishments. Understanding the placement of these items helps confirm that the correct amounts are being withheld. Regularly reviewing your pay stub ensures accuracy and provides insight into personal financial management.