Federal Taxes

• The deduction that impacts the vast majority of employees is taxes. Federal taxes include federal income tax, Social Security and Medicare. Federal income tax is usually withheld based on the W-4 elections of the employee but there are limited instances where a flat percentage is employed. Social Security is withheld at a flat rate up to the applicable wage limit. The wage limit and rate can vary by year but the latter is typically 6.2 percent. Medicare is withheld at a flat rate, usually 1.45 percent, and there is no limit.
  
  

State & Local Taxes

• State and local taxes vary widely from locale to locale. Some states have no state or local taxes, while other states have literally hundreds. Applicable taxes include state income tax, disability tax, unemployment tax and local income taxes. The latter can be assessed at the city, borough, county, or municipality level. It entirely depends on the state and where the employee lives and works. If an employee lives and works in two or more different cities or states, it is quite possible that multiple state or local taxes will apply. Each situation is unique and must be analyzed on its own merits. In very limited instances, certain taxes that are known to apply to an employee may not have to be withheld by law. However, this is rare and employers should exercise extreme caution before declining to withhold as the penalties for breaking tax withholding laws can be quite severe.
  
  

Other Statutory Deductions

• Taxes are not the only deductions that employers are legally compelled to withhold. The other primary type of involuntary deductions is garnishments. This can include court-ordered collections such as child support, creditor garnishments, bankruptcy orders, wage assignments and spousal support. Employers often face substantial penalties for not honoring withholding orders, resulting in seizure of company assets and/or making the employer liable for part or all of the employee’s obligations.
  
  

Voluntary Deductions

• There is a rather wide swath of deductions that fall under the definition of voluntary deductions. In short, a voluntary deduction is any amount that the employer agrees to administer and the employee agrees to have withheld. A more common example of this is benefit premium deductions for health insurance plans. Other examples include charitable donations, deferred compensation plans such as 401k, health saving account plans, flexible spending account plans and life insurance. Employers are generally not required to withold any of these amounts but they often do so as a courtesy or benefit to their employees.