Are Payroll Deductions Legal or Not?
As an employer, you can withhold the standard deductions permitted by federal, state and local law from your employees’ paychecks, such as federal, state and local income tax, Social Security and Medicare. But what about other deductions? Can you legally deduct them or not?
All other deductions are voluntary from the employee. According to Indiana law, you can only take deductions from your employees’ paychecks if the deduction is agreed upon by both the employee AND the employer. This agreement must be made in writing, signed by the employee and delivered to you within 10 days of completion. An employee can revoke any deductions made from their paycheck, at any time, as long they provide the notification in writing.
Additionally, only certain types of deductions are allowed, which include:
- Premiums on insurance policies your company obtains for the employee
- Contributions to charitable organizations
- The purchase of U.S. savings bonds, your company’s stock, or retirement plans like 401(k)s, SIMPLE IRAs, etc.
- Labor union dues
- The cost of merchandise sold by your company to the employee
- Loans made by your company to the employee
- Employee contributions to a hospital service or medical expense plan
- Payments to an employee’s direct deposit account
Now, you may be saying, “What about uniforms? I don’t see uniforms on the list.” Indiana law doesn’t allow you to deduct the cost of mandatory or optional uniforms from your employees’ paychecks. However, you can deduct the cost of merchandise you sell to an employee, but you and the employee must both agree upon the amount of the deduction, and you need to have a written agreement concerning the deduction.
As for loans made by your company to the employee, the deduction amount and frequency must be agreed upon by both you and the employee. And, again, it must be in writing.
Sometimes, employees may leave their employment and have an outstanding debt, for example, for goods or services, or for damage to company property. You cannot automatically deduct the outstanding debt from the employee’s last paycheck. You can only deduct the amount if it’s been put in writing in a separate legal document or you have a policy in your employee handbook concerning the repayment of outstanding debts. Otherwise, if the employee doesn’t repay the debt, your only other recourse is to file a lawsuit against the employee for failure to repay the debt.
Just remember, it’s always illegal to deduct anything from an employee’s paycheck without their written consent. So, don’t do it!
If you have any questions about employee deductions, contact The Payroll Department, Inc.
– Ariane of The Payroll Department Blog Team