Managing payroll requires strict attention to which deductions are legally allowed. Seemingly small mistakes in this regard can lead to major legal problems. It’s critical to ensure you’re in compliance with rightful allowable deductions at all times. This overview, while not comprehensive, is a brief look at the basics of mandatory, legal and unlawful deductions. Each individual case must considered in detail, as various policies apply in different situations and in each state.
By law, these deductions are required to be withheld from an employee’s gross earnings:
- FICA Tax – FICA deductions fund both Social Security and Medicare. Although each tax is calculated at different rates, the aggregate monies are collected together via the FICA deduction.
- Federal Income Tax.
- State Income Tax – If applicable.
- Local Tax – If applicable, as directed by county, city or other regional mandates.
- Wage Garnishments – Imposed by federal or state law.
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These are deductions that may legally be taken, but are not required to be deducted from the employee’s gross pay. Voluntary deductions may be initiated by the written request of the employee. With that said, an employee’s written permission doesn’t always legally grant the deduction of monies from a paycheck, such as deducting the balance of monies owed to the employer when receiving a final check due to termination.
Lawful deductions that an employer may withhold include:
- Voluntary contributions to health plans, pension plans, IRA accounts and union dues.
- For exempt employees, sick or personal days, FMLA leave and disciplinary actions.
It is important to note that permissions regarding what is or is not allowed can depend on whether the employee is exempt or non-exempt. An employer may dock the wages of a non-exempt employee in order to reimburse for damaged property or similar expenses for which the employee is directly responsible, but these deductions may not take the employee’s total wages below minimum wage. This is true even if the employer suffers losses due to the employee’s theft of company money or property.
Further, if such deductions are incurred during a week which includes overtime earnings, specific rules apply that require the overtime wage to remain at the original (i.e., not docked) rate.
- Reducing pay for exempt employees providing little or poor work (but, zero work during the week can trigger withholding).
- Uniforms – The Fair Standards Labor Act does not require that employees purchase uniforms; however, this business expense may be passed to employees in some states (though, you are still required to ensure the total earnings minus the deduction is not putting the employee below minimum wage), yet is unlawful in other states, such as California.
- Other items that benefit the employer; e.g., business cards, company photographs, company mandated medical examinations.
- Work-related expenses.
Not only are federal court decisions interpreted in various ways by the state courts, many states have specific statutes detailing what may and may not be deducted from paychecks (even with the employee’s written “consent”). Wandering into murky territory regarding deductions can spell trouble for a company and those involved in authorizing the questionable deductions. Always make sure you are familiar with the specific requirements of your state before you just assume a deduction is lawful.
If you’re ever in doubt about how to proceed, contact us, and avoid making a tricky situation worse!
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