Available to Basic Payroll, Full Service Payroll
A deduction is an amount of money withheld from a paycheck in order to make a payment to a third party such as insurance premiums, 401k savings, wage garnishments, etc. For further reading about deductions, see our payroll deductions and pre-tax vs. post-tax payroll deductions articles.
💡Patriot does not remit deductions on your behalf. You will need to remit the deducted money for health insurance, retirement (if not using our partner, Vestwell), child support, etc.)
An Explanation of Employee Payroll Deduction Types
The deduction fields discussed are visible when you make a company-level deduction. See our help article, How to Add or Edit Company-Level Deductions
Settings > Payroll Settings > Deductions & Contributions > Deductions > Add New
When adding a new deduction to be used by the company, you will need to select which Deduction Type will be used. The Deduction Type will determine which types of tax are calculated on the deduction.
Once the deduction has been assigned to an employee and used in a payroll, the Deduction Type cannot be changed. See the chart below for the taxability of each Deduction Type.
Pretax Section 125: Used for employee benefit deductions paid through a Section 125 Plan. Many, but not all, health insurance plans fall under Section 125.
It is important to note, that you’ll want to contact your insurance provider to see what type of plan you have. Unfortunately, with so many plans on the market, our support team cannot advise on this. To learn more, check out our blog article, “What is a Section 125 plan?“
When choosing "Section 125" as the deduction type, Social Security, Medicare, and Federal tax will not calculate on this amount, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
HSA Single Limit: If you have employees who contribute to a single coverage Health Savings Account (HSA), the HSA Single Limit deduction type will cap the amount of tax-free deduction up to the current IRS-defined single HSA contribution limit.
Social Security, Medicare, and Federal tax will not calculate on HSA and FSA amounts, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
The IRS places contribution limits on HSAs and has two different limits depending on whether the employee has single or family coverage.
The software will automatically stop the deduction when the limit has been met.
HSA Family Limit: If you have employees who contribute to a family coverage Health Savings Account (HSA), the HSA Family Limit deduction type will cap the amount of tax-free deduction up to the current IRS-defined family HSA contribution limit.
Social Security, Medicare, and Federal tax will not calculate on HSA and FSA amounts, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
Note, if you have different employees with both single and family HSA coverage, you will need to set up a separate company level deduction for HSA Family, since only one deduction type can be selected for each deduction.
FSA – Medical: Used for Flexible Spending Account employee contributions, which includes Medical FSAs and Individual Plan FSAs. This will cap the amount of tax-free deduction up to the current IRS-defined limit.
Social Security, Medicare, and Federal tax will not calculate on HSA and FSA amounts, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
FSA – Dependent Care: Used for Flexible Spending Account employee contributions to Dependent CARE FSAs. This will cap the amount of tax-free deduction up to the current IRS-defined limit.
Social Security, Medicare, and Federal tax will not calculate on HSA and FSA amounts, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
401k: Used for employee contributions to 401(k) retirement savings plans. The deduction will automatically stop when it reaches the IRS-defined annual limit.
💡Did you know Patriot has automated 401(k) integration through our partner Vestwell? Once your account is set up with Vestwell, your 401(k) deductions (and employer contributions) are seamlessly integrated with your payroll. Contact Vestwell for more info.
Federal tax will not calculate on this amount, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
Roth 401k: Used for taxable employee contributions made to Roth 401(k) accounts. The deduction will automatically stop when it reaches the IRS-defined annual limit.
Deductions are made after tax, so they do not reduce taxable wages.
Starter 401k – Used for employee contributions if the plan is a “Starter 401(k)” which has lower limits and lower catch up than a regular 401(k). The deduction will automatically stop when limits are met. Check out this helpful blog for more information.
Federal tax will not calculate on this amount, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
Roth Starter 401k – Used for employee contributions if the plan is a “Roth Starter 401(k)” which has lower limits and lower catch up than a regular Roth 401(k). The deduction will automatically stop when limits are met. Check out this helpful blog for more information.
Roth Starter 401(kd) deductions are made after tax, so they do not reduce taxable wages.
403b: Used for employee contributions to 403(b) retirement savings plans. The deduction will automatically stop when it reaches the IRS-defined annual limit.
Deductions reduce federal taxable income and some state income, but not Social Security or Medicare.
Roth 403b: Used for taxable employee contributions made to Roth 403(b) accounts. The deduction will automatically stop when it reaches the IRS-defined annual limit.
Roth 403b deductions are made after tax, so they do not reduce federal taxable wages.
457b: Used for employee contributions to 457b retirement savings plans. The deduction will automatically stop when it reaches the IRS-defined annual limit.
Deductions reduce federal taxable income and some state income, but not Social Security or Medicare.
Roth 457b: Used for taxable employee contributions made to 457b retirement savings plans. The deduction will automatically stop when it reaches the IRS-defined annual limit.
Roth 457b deductions are made after tax, so they do not reduce federal taxable wages.
SIMPLE IRA: (Savings Incentive Match Plan for Employees) Used for employee contributions to SIMPLE IRA savings plans. The deduction will automatically stop when it reaches the IRS-defined annual limit.
Federal tax will not calculate on the amount of a Simple IRA deduction, and therefore the employee's taxable wages will be less. State and local taxes will vary by location.
Roth SIMPLE IRA: (Savings Incentive Match Plan for Employees) Used for employee contributions to a Roth SIMPLE IRA savings plan. The deduction will automatically stop when it reaches the IRS limit.
Roth Simple IRA deductions will not reduce taxable wages.
The deduction automatically stops when the IRS-defined annual limit is reached.
Post-Tax: Used for any deduction that must be included in taxable income. Examples of after-tax deductions would be loan repayments, child support deductions, employee purchases, and benefit deductions that are not included in a Section 125 plan.
Post tax will not reduce taxable wages.
When the method is “Percent,” the deduction will be a percent of gross pay. Example: If an employee earns $1,000 in gross pay and has a deduction set up for 25% of gross pay, Patriot will calculate the deduction as $250.
Post-Tax Percent of Disposable Net Pay: This deduction type is most commonly used with wage garnishments. The deduction will be calculated as a percentage of pay remaining after income taxes have been withheld.
Calculations will be made on the employee disposable income. Gross wages - Taxes - Tips = Disposable Income
Is the Deduction Taxed?
Below is a summary of how employee income tax is calculated based on Deduction Type:
Deduction Type | Social Security | Medicare | Federal | State | Local |
Pretax Section 125 | NO | NO | NO | Varies | Varies |
401(k) | YES | YES | NO | Varies | Varies |
Starter 401(k) | YES | YES | NO | Varies | Varies |
403(b) | YES | YES | NO | Varies | Varies |
457(b) | YES | YES | NO | Varies | Varies |
Roth 401(k) | YES | YES | YES | YES | YES |
Starter Roth 401(k) | YES | YES | YES | YES | YES |
Roth 403(b) | YES | YES | YES | YES | YES |
SIMPLE IRA | YES | YES | NO | Varies | Varies |
SIMPLE Roth IRA | YES | YES | YES | Varies | Varies |
HSA | NO | NO | NO | Varies | Varies |
FSA | NO | NO | NO | Varies | Varies |
Post Tax | YES | YES | YES | YES | YES |
Post Tax % Net Pay | YES | YES | YES | YES | YES |
Some states have special rules for allowing pre-tax deductions to be taken on state or local income taxes.
After you have added a deduction at the company level, you can now assign it to individual employees. See Employee-Level Deductions.