Navigating Payroll Deductions: What Business Owners Need to Know

To deduct or not to deduct? That is the question! Business owners should be cautious about making payroll deductions for uniforms, lost or damaged equipment, etc., because these deductions are legally permissible ONLY if the employee has agreed to them in writing.

Which payroll deductions are mandatory?

Payroll taxes (social security, Medicare, income tax)
Garnishments – court-ordered remittance to settle a debt

Which payroll deductions are voluntary?

These deductions may be sheltered from payroll taxes if the employee participates in a company-sponsored IRS Section 125 plan.

Health insurance premiums
Retirement plan contributions
Certain other voluntary benefit plans

Note: Employees who do not wish to participate in company-sponsored benefit plans should sign a waiver. This waiver documents that they had the opportunity to enroll and voluntarily chose to decline.

Which payroll deductions are legally permissible ONLY if an employee has agreed to them in writing?

Cash drawer shortages
Fines for willful or negligent damage to company property
Costs for uniforms or laundering services for uniforms
Reasonable costs or fair value of meals, housing and transportation subject to government regulations
Repayment of loans or advances of wages (not a good business practice, but if you do it make sure to have a signed agreement with the employee for repayment or allowing payroll deduction)
Ensure you have a signed agreement for payroll deduction in the event of termination if employees use paid leave before it is accrued or earned (which is not recommended as a business practice).
Deductions which reduce the employee’s pay below minimum wage except in special circumstances regulated by the federal government
Cost of pre-hire medical, physical or drug tests after 90 days of employment (must have written agreement that employee will reimburse the company if employment ends before 90 days)

In addition, payroll deductions or the requirement to use paid leave in less than half-day increments may void the overtime exemption for employees classified as “exempt” under Fair Labor Standard Act regulations. This means that exempt employees could lose their exemption status if such deductions or requirements are applied. This means that the normally “exempt” employee would earn one and a half times their regular hourly rate if they work more than 40 hours in a workweek.

During the onboarding process, have employees sign a written authorization for anticipated payroll deductions. This includes deductions for items such as uniforms, loss, or damage of equipment. Write signed agreements for the repayment of loans, advances on wages, or paid leave at the time the arrangement is made.

An HR professional can help business owners navigate workplace challenges.

Next Level Solutions can assist you with all aspects of running your business. This includes hiring the right employees, running background checks, and creating employee handbooks that include anti-harassment policies and procedures. We offer a wide range of services tailored to meet your specific needs. For more information about our accounting and human resource services, contact Next Level Solutions at info@nextlevelsol.net or (225) 330-8347.