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Terms and Definitions

What is a deduction?

Updated: May 22, 2024

Deduction definition and meaning

Deductions are wages an employee earns, which are subtracted from their paycheck. Typically, deductions are made voluntarily to cover the cost of things like employer benefits. Unlike withholdings, which are required by law to collect an employee’s share of state and federal income taxes, deductions can be unique to each employee.

 

More about paycheck deductions

Employers pay many expenses on behalf of employees. For example, employers who offer retirement plans are responsible for collecting employees’ contributions and remitting them to the plan provider.

 

To calculate an employee’s paycheck, an employer begins with the gross pay (total wages) an employee earns. Next, the employer determines the net wages on the employee’s paycheck by subtracting any withholding of payroll taxes, as well as the deductions for any other expenses or obligations of the employee.

While paycheck deductions are usually voluntary, garnishments and levies are examples of involuntary deductions that can be subtracted from employees’ earnings and paid to a third -party in response to a court order.

 

Note: While payroll taxes are technically “deducted” from an employee’s net wages, the term “withholding” is typically used for such involuntary transactions.

Using deduction in a sentence

Payroll apps like OnPay let employees see their pay stubs whenever they like, so they can keep track of their 401(k) and health insurance deductions.”

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