We’re going to go out on a limb and assume you didn’t start a business because of a passion for navigating payroll. And we don’t blame you: It has a reputation for being tedious and complex — particularly the deductions and withholdings part of it.

Alas, there are a lot of legal obligations you’ve got to meet, so managing payroll deductions and withholdings is critical to running your business and staying compliant. But don’t stress yet: We’re going to break it all down for you.

Read on to learn more about:

• Payroll deductions 101: Key definitions

• Understanding mandatory federal payroll withholdings

• Understanding mandatory state and local payroll withholdings

• Voluntary payroll deductions overview

• Special considerations in payroll deductions

• Outsourcing payroll

• FAQs

Payroll deductions 101: Key definitions

Mandatory vs. voluntary deductions

First up, what are deductions? Payroll deductions are wages you — the employer — withhold from your employees’ paychecks. There are two different types of deductions: mandatory and voluntary.

Mandatory deductions are withheld from an employee’s paycheck before they even receive it, and are sent to a tax agency or other third party on their behalf (this is required by law).

These deductions include:

• Federal income tax

• State and local income tax

• State unemployment insurance, social security and medicare

• Court-ordered garnishment and payment to creditors (we’ll define these later)

Voluntary deductions are not required by law to be taken out of employees’ paychecks, but employers often provide benefits that employees can elect which involve payroll deductions.

This includes:

• Health, life and disability insurance payments

• Retirement accounts

• 401(k) contributions

• Flexible spending account or health savings account contributions

Voluntary deductions can be either pre-tax or post-tax.

Gross pay vs. net pay

Deductions make sense? OK, now let’s chat about gross pay and net pay.

Gross pay is the amount of money an employee will make before all deductions (such as taxes, benefits, Social Security, retirement savings, etc.). It reflects the employee’s salary or hourly wage plus bonuses, expenses and overtime. It’s usually the amount negotiated at the time of the hiring.

Net pay is the employee’s gross pay minus all payroll deductions. It includes mandatory and voluntary deductions (we’ll get back to those in a bit). Net pay is also called the employee’s “take-home pay” because it is the amount of the employee’s paycheck.

Withholdings vs. deductions

You may have also heard the term “withholdings,” but this is not the same as deductions. Both are subtracted from employees’ gross pay, but are not subject to the same rules.

Withholdings are taken from the employee's paycheck every pay period to pay federal and state income taxes. Most of the time, you — the employer — are required to withhold those amounts to pay the proper government agencies on behalf of your employee. The W-4 form (filled out by the employee at the time of the hiring) determines the amount of taxes to be withheld from the paycheck.

Deductions — on the other hand — are usually voluntary and determined by the employee, like contributions to healthcare or retirement plans.

Pre-tax vs. post-tax deductions

A pre-tax deduction is withheld from employee wages before you withhold taxes. That means employees have to pay taxes on a lower amount of income. Again, healthcare and retirement deductions are likely pre-tax, but this also could include flexible spending accounts (FSAs) or commuter benefits.

Post-tax deductions are withheld from employee wages after you withhold taxes. These deductions do not affect an employee’s taxable income. Common post-tax tax deductions include disability insurance, life insurance and garnishments.

Wage garnishments are deducted from employees’ checks to pay things like child support payments, defaulted student loans, taxes, unpaid court costs and more. It’s important to note that while wage garnishments are an attempt to collect a debt from an employee, it’s the employer’s responsibility to comply with the court order.

Failing to garnish wages in accordance with an order can lead to severe consequences. Employers could be required to pay fines, penalties and even the entire amount of the employee’s debt, so it’s critical to be aware of these.