What can be deducted from taxes

What Can Be Deducted From Employee Wages?

Making wage deductions isn’t always as simple as it may seem. The problem lies in whether a particular deduction is legally allowed for a particular employee. In short, allowable pay deductions are highly case-specific. That is, a deduction that is allowed for one person may not be allowed for another, even in the same company. It deends on several factors, including:

  • Whether the employee is classified as exempt,
  • The pay rate of the employee, and
  • Local laws.

This list is not meant to be comprehensive. It is meant as a primer for payroll professionals to consider before making a payroll deduction they’re unsure about.

What Can Be Deducted From Employee Wages?

Even though permissible wage deductions are case-specific, generally speaking, employers can deduct for:

  • Payroll taxes;
  • Retirement plan contributions;
  • Social security contributions;
  • Benefit plan contributions, such as the employee portion of health insurance premiums;
  • Other items for the employee’s benefit or for which the employee gives written consent, such as union dues;
  • Other legal liabilities, such as wage garnishments (subject to garnishment rules), back taxes, or child support; and
  • Repayment of loans to employees.

These types of deductions generally don’t depend on the exempt status or pay rate of the employee, but there are exceptions, even within this group. It always pays to review local laws before making a deduction you’re unsure about. Let’s take a look at some of the exceptions that make wage deductions impermissible.

Payroll Deductions: Exempt Status Matters

One of the first considerations for wage deductions is the employee’s exempt or nonexempt status. This matters because the exempt status can be jeopardized if the employer makes a deduction from pay that goes against the exemption qualifications. For example, for an employee to qualify as exempt under most of the white-collar exemptions of the FLSA, the employee must be paid on a salaried basis. This means that his or her pay is not reduced based on the number of hours worked in a given workweek. As such, if an employer docks an exempt employee’s pay for missing a couple hours of work in a workweek, that might jeopardize the exempt status of that employee.

Payroll Deductions: Wage Level Matters

Another consideration when it comes to payroll deductions is the pay rate of the employee. This matters most for employees who are paid minimum wage. Minimum wage workers typically cannot have their pay reduced for items that are for the benefit of the employer.

Uniforms are a great example of this. While it is permissible in some instances to require employees to pay for their uniforms and the maintenance of those uniforms, it is not permissible to deduct uniform expenses from wages if that will cause the wage to fall below the minimum wage. As such, if an employee is being paid minimum wage, uniforms cannot be deducted. But if an employee is being paid at a rate higher than minimum wage, then the uniforms may be able to be deducted as long as the deduction keeps the wage level above the minimum.

The requirement to keep the pay at or above minimum wage also holds true for deductions for other items that are considered to be for the benefit of the employer, rather than for the employee. Some examples include tools or compensation for losses due to employee errors.

The same rule applies for overtime pay. A wage deduction that benefits the employer cannot be taken if it takes away from the overtime pay that an employee is due.

Payroll Deductions: Location Matters

Last on our list today, but certainly not least, is to note that location matters. Local laws may vary significantly from federal laws and are sometimes stricter. This can even result in employees in different locations being treated differently while working for the same company.

For example, there are both federal and state laws regarding items such as loan repayments, wage garnishments, minimum wages, overtime pay, and much more. Also note that final paychecks may have differing (often stricter) rules than regular paychecks.

If you’re ever in doubt about whether a payroll deduction is permissible, check local laws to be sure.

About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.



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Category: Taxes

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