Voluntary deductions from wages are withheld only if the employee grants permission to the employer. You can pay most voluntary deductions from pretax dollars, which lowers your taxable income. Specific voluntary deductions vary by employer. Large companies may offer a wide variety of benefits that employees pay toward, while a small company may offer only a few benefits. Employees can cancel any voluntary deduction, but in some cases, must wait to do so during enrollment periods.
Health insurance premiums are a common voluntary deduction withheld from many employees’ wages. Employers may offer group medical, dental and vision coverage to their employees. In some cases, an employer may choose to cover a percentage of the employees’ health insurance premiums while deducting the remaining amount from paychecks. Health insurance premiums paid with your pretax wages are not deductible on your tax return.
Another common voluntary deduction from wages is retirement plan contributions. You can choose to make contributions from pretax or after-tax dollars. For-profit companies may offer employees 401(k) benefits, while non-profit organizations may offer 403(b) plans to their employees. You determine the contribution amount you want withheld from your paycheck, up to the amount allowed by the IRS. According to the IRS, the 2012 contribution limits for 401(k) and 403(b) plans are $17,000 per plan. The limit increases to $17,500 for 2013. Employers are allowed to match your contributions. For example, your employer may choose to contribute 50 cents for every dollar you invest into your retirement plan.
Flexible Spending Accounts
You establish the voluntary deduction amount for a flexible spending account at the beginning of the plan year. You are not required to pay federal income tax on your contributions. As of 2012, the contribution limit deducted from your paycheck is $2,500. Beginning in 2013, the maximum payroll deductions for your FSA will be subject to a cost-of-living adjustment. The distributions made to reimburse you for qualified medical expenses are also exempt from federal income tax. You employer can also make contributions into your FSA. The IRS allows you to exclude employer contributions from your income. You can only terminate or change your plan during the year if you have experienced a change in your family or employment status.
Life Insurance Premiums
In most cases, employees can allow voluntary deductions from their wages for life insurance and supplemental life insurance premiums. Many employees take advantage of group life insurance offered by employers because premiums are inexpensive and the insurance provides a death benefit for you and your spouse. Accidental death and dismemberment insurance is another voluntary deduction that provides you with additional coverage in the event of a serious injury or death.