What is a 'Payroll Deduction Plan'

A payroll deduction plan refers to when an employer withholds money from an employee's paycheck for a variety of purposes, but most commonly for benefits. Payroll deduction plans may be voluntary or involuntary. One common example of an involuntary payroll deduction plan is when an employer is required by law to withhold money for Social Security and Medicare. A voluntary payroll deduction plan happens when an employee opts for — and gives written permission to — an employer to withhold money for certain purposes, such as a retirement savings plan, or healthcare or life insurance premiums, among others.

Breaking Down 'Payroll Deduction Plan'

Payroll deduction plans offer employees a convenient way to automatically contribute income toward an ongoing expense or investment. For example, it is common for employees to deduct a set percentage of income and contribute it to their traditional Individual Retirement Account (IRA) or Roth IRAs. An employee may also choose to have the premiums from an insurance policy deducted from their pay, ensuring that a payment is never missed.

Some payroll deduction plans may also involve the voluntary, systematic payroll deductions to purchase shares of common stock. In such cases, the employee opts into their employer's stock purchase plan and a portion each paycheck goes to buying shares of their employer's stock, generally at a discounted price. In an example provided by the Securities and Exchange Commission (SEC) regarding the Employee Stock payroll Deduction Plan at Domino's Pizza, Inc., eligible employees may opt to allocated 1-15% of their paycheck to buying company stock priced at 85% of fair market value of the date the option is exercised.

Payroll Deduction Plan Examples

Some common voluntary payroll deduction plan examples include:

  • 401(k) plan, IRA, or other retirement savings plan contributions
  • Medical, dental or vision health insurance plans
  • Flexible spending account or pre-tax health savings account contributions
  • Life insurance premiums (often sponsored by the employer)
  • Charitable to employer-sponsored charitable giving plans
  • Short-term disability insurance plans
  • Payment for job-specific items, such as clothing, uniforms or tools
  • Union dues
  • U.S. Savings Bond purchases
  • Payments for purchases of company merchandise (computers or other retired equipment)
  • Tuition or professional certification fee deductions

Some common involuntary payroll deduction plan examples include:

  • Federal income tax withholding (federally mandated)
  • FICA taxes (for Social Security and Medicare contributions and premiums)
  • State income tax withholding (mandated by states that impose a tax on income)
  • Local taxes (imposed by cities, counties and towns for disability and/or unemployment insurance)
  • Child support payments (when ordered by a court)
  1. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  2. Payroll Tax

    A payroll tax is a tax an employer withholds from an employee's ...
  3. Buyback Deductible

    A buyback deductible allows an insured party to pay a higher ...
  4. Property Tax Deduction

    Property tax deduction refers to state and local property taxes ...
  5. Tax Deductible Interest

    The tax deductible interest is a borrowing expense that a taxpayer ...
  6. Additional Voluntary Contribution ...

    An additional voluntary contribution is an extra allocation of ...
Related Articles
  1. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  2. Personal Finance

    11 Tax Deductions You Can't Actually Write Off

    These are some of the most common tax write-offs that you can't really claim.
  3. Tech

    Tax Tips for Deducting Investment Management Fees

    Investment expenses can be deducted from your taxes when three main criteria are met. Here's how they work to help you maximize your tax deduction.
  4. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  5. Taxes

    The Most Overlooked Tax Deductions

    The receipts you cram into your wallet could be replaced with cash come tax season.
  6. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  7. Financial Advisor

    20 Medical Expenses You Didn't Know You Could Deduct

    To lower your tax bill, be sure not to miss out on these commonly overlooked medical tax deductions.
  8. Taxes

    5 Overlooked Tax Deductions for Small Businesses

    It's easy for small business owners to miss a few tax write-offs. Here's where to find them.
  9. Retirement

    The 401(k) and Other Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  10. Taxes

    Are You Getting a Tax Deduction for Your Donation?

    When done properly, a charitable donation of your RMD can equal a tax deduction for you.
Trading Center