Understanding Pay Stub Deductions: A Guide for Small Businesses

Most Americans today are paid monthly. Workers paid in this way usually receive pay stubs, which detail the pay they receive and the deductions taken from it.

However, many people are unaware of exactly what these deductions are, or where this money goes once it is taken from their gross pay. Because of their number, and the ways in which they are abbreviated on pay stubs, it can be almost impossible to tell deductions apart unless you know what you’re looking for.

Read on as we look at some of the main pay stub deductions you’ll have to make from your employees’ pay.

Federal Income Tax

Federal income taxes are those paid to the US government. 

The amount of federal income tax owed by an employee will depend on the allowances to which they are entitled. These allowances are detailed by employees themselves on their Form W-4.

Allowances are generally based on an employee’s family situation. The more dependents they have, the less federal income tax they will be required to pay.

State & Local Income Taxes

These obviously vary from state to state. Some states do not withhold any income tax at all, including Texas, Washington, Florida, and Nevada.

If your business is in a state that does have income taxes, however, you’ll have to include these on your pay stubs. Employees must each fill out a state tax withholding form, which will detail their specific tax liability.


There are two parts to these taxes; social security deductions and Medicare deductions. Both are mandatory deductions in every state.

For social security, 6.2% of the employee’s gross income is withheld. For Medicare, 1.45% is withheld. FICA tax, therefore, adds up to a total of 7.65% of an employee’s gross wage.

An important point to note in relation to FICA tax is that employers must match the amount deducted from employee paychecks when paying it. For instance, if you have an employee paying $50 a month in FICA taxes, you will also have to pay this amount.

Voluntary Deductions

Employees can choose to have certain things deducted directly from their paycheck.

Common voluntary deductions include health insurance, retirement plans, and various savings accounts, such as FSAs and HSAs, which can be used to lower tax burdens.

These may cause more headaches for business owners than mandatory deductions, as they will vary more from worker to worker. If you need help creating real check stubs, it might be worth using an online generator.

Do You Know Your Pay Stub Deductions?

You now have enough knowledge to recognize the primary pay stub deductions that will arise for employees of small businesses. While deductions can be difficult to get the hang of, they’re easy to recognize once you know what you’re looking for.

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