Voluntary deductions are withholdings that employees can opt into as a way to contribute to employer-offered perks such as retirement savings and health insurance plans. That said, it’s important to have this process down pat when managing payroll because not all voluntary deductions for contributions happen the same way.
What you’ll learn
What you’ll learn
Updated: January 31, 2025
Key takeaways
- A deduction is an expense that you can subtract from your gross taxable income to reduce your tax burden. Deductions can be either voluntary or involuntary.
- Employees decide how much to take out of their paychecks for voluntary payroll deductions to cover the cost of benefits they choose to participate in.
- You can withhold certain voluntary deductions, like health insurance premiums and 401(k) contributions, on a pre-tax basis, while others are solely post-tax deductions.
- Pre-tax deductions can help you reduce your tax burden when calculating payroll taxes.
Understanding voluntary deductions will help you manage your payroll more efficiently, keeping your employees happy and your organization running smoothly. Read on to dig deeper in this helpful guide.
What are voluntary deductions?
Simply put, voluntary deductions are taken out of employees’ paychecks for beneficial programs that they choose to participate in. Generally, an employee will instruct their employer to deduct money from their paycheck to put toward these programs, resulting in a lower dollar figure. Since employees can opt into or out of these programs, voluntary deductions often vary greatly from one employee to another.
Employers have to carefully manage these payroll tax deductions to maintain compliance and make sure their employees receive the right amounts on their paychecks every pay period.
Moving on, let’s find out more about some of the voluntary deductions that most employers and employees are likely to encounter.
Voluntary deductions include
There are many different types of voluntary deductions, and you may not offer your employees each of these programs. Here are the most common examples of voluntary deductions.
Health insurance premiums
If one of the benefits you offer is medical, dental, vision, or other healthcare coverage, many employees will likely choose to deduct their health insurance premiums from their paychecks. As the employer, you then take those deductions to pay for the employee’s health insurance coverage through your group plans. You can make health insurance deductions as pre-tax deductions through a Section 125 plan, which may benefit you and your employees.
Did you know this small business stat?
Forty-six percent of companies in OnPay’s 2024 small business survey provide some type of health insurance option. As employee size grows, the likelihood of offering health benefits greatly increases.
Source: 2024 small business observations on back office, benefits, and the economy
Retirement plan contributions
As an employer, you may also offer options to help your employees save for retirement, such as 401(k) plans or Individual Retirement Accounts (IRAs). If employees want to contribute, they can instruct you to withhold a portion of their income to contribute to these accounts on their behalf.
The employees’ 401(k) contributions are still subject to FICA taxes but are deferred for federal income tax and state income tax in some states. IRA contributions are on a post-tax basis.
Note that if you offer employee matching for 401(k) or other retirement contributions, those are not considered voluntary deductions. Only the amount the employee chooses to contribute from their paycheck toward retirement savings is a voluntary deduction.
Pro tip
A growing number of states are making employee access to retirement savings a requirement. In most cases, this means an employer can offer the state’s plan or work with a private provider. For more information and to see if one is up and running where you do business, take a look at the states with mandatory retirement plans.
Life insurance
Group life insurance is another popular benefit that many employers offer. Providing basic life insurance at no additional cost to your employees will not create a voluntary deduction because the employees don’t have to pay for it. However, if you offer additional life insurance coverage that they can choose, the premiums for that coverage would be voluntary deductions. Generally, employers deduct life insurance premiums post-tax. An OnPay survey found that 33% of small business owners have life insurance on their wishlist of benefits they’d like to offer. See other perks employers are considering in the graphic below.
Flexible spending accounts (FSAs)
Flexible spending accounts (FSAs) allow employees to contribute some of their income on a pre-tax basis to cover eligible healthcare and dependent care expenses. If their employer offers this benefit and employees choose to participate, they will instruct their employer to take a set amount out of their paycheck to put in their FSAs. As of 2025, employees can contribute up to $3,300 per year per employer but may choose to contribute less.
Health savings accounts (HSAs)
Health savings accounts (HSAs) are similar to FSAs, but they’re only available to people who are enrolled in a High Deductible Health Plan (HDHP). Like with FSAs, eligible employees can choose to contribute pre-tax funds from income to their HSAs to pay for qualified medical expenses. As of 2024, the yearly limit for HSA contributions was $4,150 for individuals with self-only HDHP coverage and up to $8,300 for those with family HDHP coverage. Employers take the amount employees specify out of their paychecks to contribute to the HSAs. For 2025, the amounts are $4,300 for individuals and $8,550 when it comes to family coverage.
Benefits of voluntary deductions
Though they can make payroll management a bit trickier, voluntary deductions can benefit employers as well as employees.
For employers, offering optional benefits like health insurance coverage or retirement savings plans can help attract and retain top talent. Your employees will likely be more inclined to stick around if you offer a competitive benefits package that includes voluntary deductions that they can make decisions about. Even if some employees choose not to participate, providing these benefits shows you care about their physical and financial well-being.
For employees, voluntary deductions give them more control over how they allocate their earnings. Employer-sponsored benefits programs are generally less expensive than other options, and employees can choose to participate in the benefits programs that most appeal to their needs and preferences, often while also lowering their taxable incomes.
Best practices for implementing voluntary deductions
If you offer any programs that create voluntary deductions, you need to manage them carefully to avoid disgruntled employees or compliance concerns. Abide by the following best practices.
Stay on top of regulatory compliance
Pay close attention to the rules governing voluntary deductions. For example, you generally need written consent from your employees before deducting funds for any voluntary programs from their paychecks. Also, clearly show the amount of the voluntary deductions on each paycheck, including a year-to-date total. Make sure you understand and follow all these regulations to avoid fines, penalties, or unhappy employees.
Implement clear communication strategies
It’s also important to make sure your employees understand all the options they have. After all, they can only participate if they know the programs exist and understand how they work. To help your employees wrap their heads around voluntary deductions, try explaining their options in multiple ways. For example, you might share a video listing the benefits you offer as part of the onboarding process and follow up with a written explainer of the programs employees can opt into.
Keep meticulous records
You need to know exactly how much you deducted from each employee’s paycheck to comply with regulations and accurately calculate your payroll taxes. To avoid a mad scramble at tax time, keep meticulous records of the mandatory and voluntary deductions you make for all of your employees during every pay period. You’re likely to find tracking all this information in payroll software much more convenient than manual record-keeping. Also, keep copies of each employee’s written consent to participate in each program.
Perks employees want
Looking to create an employee perks program? Our research highlights the most important benefits to employees that can help shape your planning.
Common challenges in managing voluntary deductions
It’s normal to encounter some challenges while managing voluntary deductions for your workforce. As long as you’re aware of common challenges and how to avoid them, payroll management should go smoothly. Consider these top challenges for employers with voluntary deductions:
- Misunderstanding of options: Often, employees don’t know exactly what their options are when it comes to benefits programs and voluntary deductions. This confusion can lead to frustration and missed opportunities if employees miss out on participating in programs they would have chosen.
- Administrative errors: Employers need accurate records of employees’ choices regarding voluntary deductions and contribution amounts. Incorrect data entry and other administrative errors can lead to payroll discrepancies, so double-check to make sure everything is correct.
- Inconsistent communication: If anything changes about your benefits package regarding voluntary deductions, clearly communicate those changes to your employees. Prompt notification can head off conflict and keep everyone on the same page.
Understanding voluntary deductions should be on your to-do list
Offering employees access to benefits programs can be an impactful way to attract talented job seekers and keep your longstanding staffers from looking to see if the grass is greener elsewhere. Just keep in mind that deductions need to be accounted for and handled properly, whether pre-tax or post-tax. Many online payroll companies, like OnPay, can automate these deductions to ensure that contributions run smoothly and that employee confusion remains minimal as pay periods come and go.
OnPay’s expert team is here to help if you have any questions. Or if you’re ready to learn more, click the get started button to see how we can simplify your payroll process.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.