Making Deductions From Pay

Deducting money from an employee's paycheck can be extremely complicated because of federal and, perhaps, state laws that control how deductions are made.

Deductions required by law. It is your obligation to collect and remit the payroll taxes that your employees owe, as well as paying your share of certain taxes on your employees’ pay. Together, the taxes that you withhold and those that you pay comprise your payroll taxes.

The Federal Insurance Contributions Act (FICA) is a federal law that requires you to withhold two separate taxes from the wages you pay your employees: Social Security tax and Medicare tax.

If you run your business in a state where there are state-mandated temporary disability insurance programs, you can probably add to your payroll tax obligations a duty to withhold and/or pay taxes to fund the state’s program.

Deducting pay for tardy employees. Depending on how you choose to pay your employees, you may deduct pay from nonexempt employees who are late or fail to punch the time clock (if you have one). However, if you choose to do so, be sure that the deductions don't result in an employee being paid less than the government mandated minimum wage or not being paid for overtime.

By definition, exempt workers are paid a salary, which means that they get the same amount of pay regardless of how many hours they work in a week. Deducting pay from an exempt employee for absences of less than one day is illegal. You can, however, choose to not pay exempt employees who are absent for a whole day. (Or, you might require employees to take a paid sick or vacation day, if you offer these benefits.)

Overpayments. Generally, if you paid an employee too much because of a legitimate bookkeeping error, you can deduct the mistaken overpayment from wages, even if the deduction reduces the pay below the statutory minimum wage for a particular pay period. However, if the deduction would cause a hardship, you're required to spread the repayments out over time. It’s in your interest to work with the employee on this to avoid disrupting an employee's cash management.

Uniforms. You can't reduce an employee’s wage for the pay period below the minimum hourly rate by deducting the cost of purchasing, renting, or maintaining a required uniform. Spread those costs over a sufficient number of pay periods to avoid this problem.

Benefit premiums. If you offer benefits and employees must share in the cost, you should deduct the amounts of premiums for those benefit plans to ensure that premiums are paid. It’s in your best interest because, as an employer providing benefits, you're responsible for the payments. Be sure you have the employee’s signature before making any deductions. If the deductions for pension or health plans cut into statutory minimum wage and overtime pay requirements, you can deduct them only if the employee voluntarily agrees and you don't get any profit or benefit from the transaction.