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Anytime the word “deductions” is thrown around, there’s often fear and lots of questions. Employees may ask, “Are these deductions something I signed up for?” Or, “Should these be coming out of my paycheck?” How do you answer them? Read on to learn all you need to know about voluntary deductions.

What Are Voluntary Deductions?

Contrary to what you may know about involuntary deductions, voluntary deductions are deductions your employees have elected to participate in. Not only is the election voluntary, but the amount can be selected as well depending on the deduction. These deductions will not come as a surprise (unless they were forgotten) because voluntary deductions are items employees are aware of at all times.

Voluntary vs Involuntary Deductions

While voluntary and involuntary deductions are different, they do share a similarity: they both come out of payroll. If your employee elected into one of the voluntary deductions offered by your employer, your organization is required to take that from their paycheck as agreed upon. Just as involuntary deductions are like taxes or garnishments and are required to be deducted from paychecks, voluntary deductions are no different. The important difference between the two is that involuntary are beyond your employee’s control, while voluntary are opted into and controlled at the employee level.

Examples of Voluntary Deductions

Now that you understand what voluntary deductions are, let’s dive into some common examples you may see when it comes to voluntary deductions.

Retirement Savings Contributions

If your employer offers a retirement savings plan, employee contributions to that plan are voluntary deductions. Most organizations will base these contributions off of a percentage of income each paycheck, but some provide the opportunity to select a set dollar amount. Either way, that deduction will come out of your employee’s paycheck every time they are paid at the agreed upon amount.

Insurance Premiums

Things like medical, dental, vision, FSAs (flexible spending accounts), life insurance premiums and short-term disability premiums are all examples of voluntary deductions. Once a year, typically during open enrollment, your organization will go over the insurance potentials for your organization. Sometimes there are premium adjustments year to year depending on the market, and that will be shared by your organization to give your employees the opportunity to opt into this voluntary deduction. Keep in mind, these deductions can change yearly as benefits change and this information should be communicated clearly so that employees can make an informed decision about their voluntary benefits.

Certification or Tuition Deductions

While some employers may pay for certification or additional tuition if applicable, this is not always the case. If these are monetary requirements for your employees, they can come out as voluntary deductions from their paycheck. The amount would be agreed upon in writing via a payroll deduction form detailing how much will be deducted from their paycheck each payment and what the deduction is for. From there, you should explain how long the deduction will take place and when your employee can see this deduction end.

Workplace Charity Donations

Many organizations support a charity company wide and may give employees the opportunity to opt into supporting that charity. These types of deductions are voluntary, as your employees are under no obligation to contribute any amount, so the amount they choose is completely up to them. Typically these contributions can be adjusted at any time of the year, should your employer allow it, which allows employees the opportunity to contribute at their financial comfort level.

Office Purchases

This can range from laptops, computers, office equipment or company branded clothing. Considered a voluntary deduction, your employer will charge employees for these via payroll. It may be clearly defined on employees’ paychecks as “office equipment” or may come up as “misc deduction” depending on your organization’s payroll company and their capabilities. It’s important to note that this deduction is voluntary because your employees at some point agreed and opted into the deduction.

Company Phone Plans

If your organization has a company wide phone plan that employees are able to participate in, that would fall under voluntary deductions. While your employees would not be required to participate, if they use their phone for work purposes frequently, or if the phone plan is at a discounted rate than what they pay as an individual, it is considered an added perk of employment.

Why Are Voluntary Deductions Helpful?

When it comes to voluntary deductions, their benefits exceed that you or your employee get to choose them. Let’s review a few ways that voluntary deductions are helpful.

  • Lower taxable income. If your employee chooses to opt into pre-tax voluntary benefits you offer, they are lowering their end of year taxable income by the amount they are withholding for that benefit. For example, if they contribute $2,000 over the year to a tax-deferred 401(k), their taxable income goes from $40,000 to $38,000 at the end of the year. That’s a helpful perk for voluntary deductions!
  • Provide additional benefits. Outside of the tax benefits of pre-tax voluntary deductions, these deductions provide your employee with benefits they may not otherwise have. Giving your employees the opportunity to contribute to a charity or to opt into company benefits may not have been possible without voluntary deductions.
  • Provide group rates. Your company may provide voluntary benefits at a discounted rate than what your employees can find on their own. For example, if your organization offers a company phone plan, often the amount employees pay is a group rate and is substantially lower than the rate they would pay on their own. This is a voluntary deduction, and an extremely monetarily friendly one at that!

Tips for Businesses to Handle Voluntary Deductions

Now that it’s clear what voluntary deductions are and how they can be helpful for your organization, here are some tips to take care of voluntary deductions at your company.

Tip 1: Utilize Your Payroll System

No matter the size of your organization, keeping track of deductions can be an extremely difficult task. Manually tracking is time consuming without a doubt, but can also open your organization up to risk of errors without utilizing your already implemented payroll system. With your payroll, you have a way to pay employees, so best practice is to utilize that system for these deductions. You are most likely using the payroll for involuntary deductions as well, so extend the usage here and keep all this information in one place.

Tip 2: Require Updated Deductions Yearly

Your voluntary medical, dental, vision, life insurance and short-term disability insurance deductions may need to be updated yearly via open enrollment. It’s best to ensure all deductions are updated at the same time. Give your employees access to either your payroll system to opt into or change their deductions, or provide them with the company approved payroll deduction form every year to approve and update these deductions. While some employees may not make changes on their own, it’s good for them to actively review and adjust these every year.

Tip 3: Organize Effectively

Most importantly, organization of voluntary deductions is key. Your payroll system may have a place for these to be stored and you can go back to previous checks and review accordingly. If you’re utilizing paper or emailed forms, be sure you’re storing them with employees’ files for quick access and evaluation when needed. As voluntary deductions can change frequently, depending on your organization’s policies, it is extremely beneficial to keep these documents organized effectively.

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Questions You’ve Asked Us About Voluntary Deductions

Yes, taxes are paid on voluntary deductions unless specified by the IRS that it is not required. Items such as medical, dental, vision and 401(k) contributions are on this list. It’s important to check this list regularly for updated information. 

This depends on the deduction and the employer. Most employers allow employees to adjust things like their 401(k), FSA or charity contributions at any time, but deductions like health, dental and vision insurance may only be updated once a year during open enrollment. It’s important to check with your employer for their policy relating to voluntary deductions. 

Shalie has over 4 years of experience working in a variety of HR positions and organizations including: working as an HR department “of one”, working with a start-up based in Europe, to working in a fully established robust USA based HR department. Shalie has experience in multiple states and countries with all aspects of the HR spectrum. She has a passion to share her knowledge and experience to benefit the HR profession!

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