When Can You Legally Deduct from Employee Wages?
Understanding when and how you can legally deduct from an employee’s paycheck is crucial for compliance and maintaining trust within your organization. This guide outlines the types of permissible deductions under U.S. federal law, highlights common pitfalls, and offers practical tips for small-to-mid-sized employers.
Mandatory Payroll Deductions (Required by Law)
Employers are obligated to withhold certain amounts from employees' paychecks to comply with federal, state, and local laws:
Federal Income Tax: Withheld based on the employee's Form W-4 and IRS guidelines.
FICA Taxes: Comprising Social Security (6.2% up to $176,100 in 2025) and Medicare (1.45% on all wages). An additional 0.9% Medicare tax applies to wages over $200,000.
State and Local Taxes: Withholding requirements vary by jurisdiction.
Court-Ordered Garnishments: Such as child support, tax levies, or creditor judgments. Employers must comply with these orders, adhering to federal and state limits on the amount that can be garnished .
Voluntary Deductions (With Employee Authorization)
These deductions require the employee's written consent and often relate to benefits or other programs:
Retirement Contributions: 401(k), 403(b), or similar plans.
Health and Dental Insurance Premiums: Often deducted pre-tax.
Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs): Allow employees to set aside pre-tax dollars for medical expenses.
Commuter Benefits: Pre-tax deductions for transit or parking expenses.
Union Dues: If applicable.
Charitable Contributions: To organizations approved by the employer.
Ensure that all voluntary deductions are documented with clear authorization from the employee.
Deductions That Require Caution or Are Prohibited
Certain deductions are either restricted or outright prohibited under federal law:
Uniforms and Tools: Employers may deduct the cost of uniforms or tools, but only if doing so doesn’t reduce the employee’s pay below the federal minimum wage. To protect both parties and ensure transparency, it’s best practice to have a signed agreement in which the employee acknowledges and authorizes these specific deductions.
Cash Shortages or Breakage: Deductions for losses due to cash shortages, breakage, or equipment damage are generally prohibited unless the employee's gross negligence or willful misconduct can be proven. Even then, deductions must not bring pay below minimum wage and may require written consent.
Overpayments: Recovering overpaid wages is permissible, but the process varies by state. Some states require employee consent, while others allow deductions without it. Always check state laws before proceeding.
Special Considerations for Exempt Employees
Under the Fair Labor Standards Act (FLSA), exempt employees must receive their full salary for any week in which they perform work, with limited exceptions::
Permissible Deductions: Deductions can be made for full-day absences due to personal reasons, disciplinary suspensions, or unpaid leave under the Family and Medical Leave Act (FMLA).
Improper Deductions: Making unauthorized deductions can jeopardize the employee's exempt status, potentially leading to liability for unpaid overtime.
Best Practices for Employers
Develop a Clear Payroll Deduction Policy: Outline all permissible deductions, authorization procedures, and ensure compliance with federal and state laws.
Obtain Written Consent: For all voluntary deductions, secure and retain written authorization from employees.
Stay Informed on State Laws: Payroll deduction regulations can vary significantly by state. Regularly review and update practices to remain compliant.
Maintain Accurate Records: Keep detailed records of all deductions, authorizations, and communications related to payroll.
Consult with HR Professionals or Employment Lawyers: When in doubt, seek guidance to navigate complex deduction scenarios and ensure compliance.
Navigating the complexities of payroll deductions is essential for legal compliance and fostering a trustworthy workplace environment. If you need assistance in developing or reviewing your payroll practices, schedule a free consultation with our HR experts.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Employers should consult with a qualified attorney or HR professional to ensure compliance with federal, state, and local laws that applies to their company. Laws and regulations are subject to change and may vary by jurisdiction. AZ HR Hub is not responsible for any actions taken based on this content without professional consultation.