Which Deductions From Your Paycheck Are Voluntary?

An employee’s gross pay, their total earnings before any subtractions, is rarely the same amount they receive on payday. The difference is the result of payroll deductions, which are amounts subtracted to cover various obligations and benefits. These deductions determine an employee’s final take-home pay, explaining why the number on an offer letter differs from the deposit into a bank account.

Defining Voluntary Deductions

A voluntary deduction is an amount withheld from a paycheck only with an employee’s explicit permission. These are optional subtractions an individual elects to have taken out, often to pay for a benefit or service offered by the employer. Without an employee’s signed authorization, an employer cannot make these withdrawals.

This contrasts with mandatory deductions, which are required by law. Mandatory deductions include federal and state income taxes, Social Security and Medicare taxes (FICA), and court-ordered garnishments like child support. An employer is legally obligated to withhold these amounts, whereas voluntary deductions are entirely at the discretion of the employee.

Examples of Pre-Tax Voluntary Deductions

Many common voluntary deductions are taken from an employee’s pay on a pre-tax basis. A pre-tax deduction is subtracted from an employee’s gross pay before income taxes are calculated. This lowers the employee’s taxable income, resulting in paying less in federal and most state income taxes for that pay period.

Health insurance premiums are a common example. When an employee enrolls in an employer-sponsored health, dental, or vision plan, their share of the monthly premium is deducted before taxes. By paying for insurance with pre-tax dollars, the actual cost to the employee is reduced.

Contributions to traditional retirement savings plans, such as a 401(k) or 403(b), are another pre-tax deduction. When an employee elects to contribute a percentage of their salary to one of these accounts, the funds are deferred before income tax is assessed, which lowers current taxable income. The money grows tax-deferred until it is withdrawn in retirement.

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) also fall into this category. Contributions to an HSA, which must be paired with a high-deductible health plan, are made with pre-tax dollars and can be used for qualified medical expenses. Similarly, Healthcare FSAs and Dependent Care FSAs allow employees to set aside pre-tax money for out-of-pocket medical costs or childcare expenses, respectively.

Examples of Post-Tax Voluntary Deductions

Other voluntary deductions are taken from an employee’s pay after all mandatory taxes have been calculated and withheld. These are known as post-tax deductions because they do not lower an employee’s taxable income.

An example is contributions to a Roth 401(k) or Roth 403(b) retirement plan. Unlike their traditional counterparts, Roth contributions are made with post-tax dollars. This means the employee pays taxes on the contributed amount now, but qualified withdrawals in retirement are tax-free. This option appeals to individuals who anticipate being in a higher tax bracket during their retirement years.

Premiums for certain supplemental insurance policies are also post-tax deductions. For instance, employees often pay for short-term and long-term disability insurance with post-tax dollars, which ensures that any benefits received from the policy are not taxable. Premiums for any additional, voluntary life insurance an employee chooses to buy beyond employer-provided coverage are also paid with post-tax dollars. Other common post-tax deductions include charitable contributions made via payroll deduction, union dues, and repayments for a loan from the company.

How to Authorize a Voluntary Deduction

An employer cannot begin taking a voluntary deduction from an employee’s paycheck without receiving clear, documented permission. This process requires the employee to provide explicit, written consent for the specific amount and purpose of the withholding, which serves as a legal record.

This consent is captured on a “payroll deduction authorization form” or through an electronic benefits enrollment system. During a new hire orientation or an annual open enrollment period, employees are presented with the benefits available to them and must complete the necessary paperwork or online forms to enroll.

The authorization document will detail the type of deduction, such as for health insurance or a 401(k) plan. It will also specify the amount to be withheld, either as a fixed dollar amount or a percentage of pay, and the employee must sign and date the form to affirm their choice.