There are times when an employee’s actual gross pay (excluding taxable fringe items) is insufficient to accommodate all of their deductions in full. In those cases where there is not enough net pay, there is an order in which deductions are to be processed until the check is zero. I am going to cover the basics of that order without going into the details of each specific deduction, as this would end up being a super-sized blog. Be sure to check out my previous blogs for details on some of the specific deductions.
Deductions are taken in the order below, subject to any limits on the deduction itself. There are exceptions to some of these rules based on timing. For example, in the case of a Federal Tax Levy in place prior to the receipt of a Child Support Order the Levy will take priority, but if the Levy comes in after the Child Support Order, the child support deduction will take priority.
TAXES – Taxes are the first in line when it comes to deduction from an employee’s check. In general, the order is federal, state and local tax authorities.
- Social Security Tax (OASDI)
- Medicare Tax
- Federal Income Tax
- State Income Tax
- Local Income Tax
INVOLUNTARY DEDUCTIONS – Just as the name states, these are deductions that neither the employee nor employer has any control over, and includes debts to others.
- Federal Tax Levy
- Child Support
- Alimony Payments
- Bankruptcy – the bankruptcy court may specify a different order which must be followed and may very well take priority in this category.
- Federal Student Loan
- State Tax Levy – state laws may vary as to the order
- State Student Loan
- Local Tax Levy – local laws may vary as to the order
- Commercial Garnishments
In cases of the above involuntary deductions, other deductions may need to be taken into consideration. An example would be for the amount to deduct for a Federal Tax Levy. To determine the amount to withhold, the employer would reduce the gross pay by all taxes as well as other involuntary and voluntary deductions in effect at the time the Levy was received.
OPTIONAL BENEFITS – These benefits may not necessarily have any order within their group, although a company may set its own policy. For companies that have a 401(k) or other retirement plan in place, one should refer to the plan’s governing document and summary plan description for guidance as to its priority among other deductions.
- Health Care
- Dental Care
- Vision Care
- 401(k)/403(b)/Pension & Retirement Contributions
- Health Savings Account (HSA)
- Optional Life Insurance Premiums
- Long Term Care Insurance
- Dependent Care Flexible Spending Accounts
- Thrift Savings Plan
OTHER VOLUNTARY DEDUCTIONS – I have put these in a classification by themselves as we typically find that they take a lower priority than the Optional Benefit group above. Once again, the actual order of deductions within this group are typically set based on company policy.
- Company Loans and Advances
- Union Dues
- Professional Associations
- Christmas Club
- Savings Bonds
I have found that some payroll systems treat direct deposit as a deduction. Be careful in these situations as this is considered a method of payment and is not an actual deduction. For those who utilize a payroll service, be sure to notify them as to your priority order. Their default order may not be in-line with your company’s policy or requirements.
As a guide, one can use the Order of Precedence as published by the U.S. Department of Commerce’s Office of Human Resources Management for use by civilian Federal employees. https://www.commerce.gov/hr/practitioners/compensation-policies/general-pay/order-of-precedence-from-gross-pay
As you can see, there are many variables when prioritizing deductions, including timing and a lack of clear and concise rules to consider; all the makings of a potential disaster. The purpose of this article is for you to consider all of the deductions you have in place, and to establish your priority list ahead of time, so you can be ready for that case, should it arise. It is a lot easier to consult with the parties and agencies involved when time is on your side, opposed to panicking when payroll needs to be processed expeditiously.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional as federal, state, and local laws change frequently.