What Cannot Be Deducted or Withheld (Wages)

State laws generally control what may be deducted or withheld from an individual paycheck. Commonly, only a few things are off-limits for an employer to deduct:

the value of time taken for meal periods (see Section D3, above)

the cost of broken merchandise

tools and materials used on the job

required uniforms, and

cash register shortages and losses due to theft.

The History of Payroll Withholding
The Social Security Act of 1935, a part of President Franklin D. Roosevelt’s New Deal, was the first law to sink its teeth firmly into the typical paycheck. Intended only to save industrial and commercial hourly workers of the Depression era from poverty in old age, the original Social Security program required employers to withhold a mere 1% of workers’ pay.

Since then, the Social Security Act has been amended many times. The age of eligibility has been lowered from 65 to 62, and coverage has been extended to people unable to work because of physical disabilities, government employees, self-employed people, and a number of other groups not covered by the original Act. Consequently, the amount withheld from most wages to pay for Social Security programs now is more than 7%.

Public debate is again abuzz with talk of the Social Security Act, prompted by statistics of aging and survival and what it means for the changing workforce. Baby boomers will begin retiring in less than a decade, and life expectancy is rising. By 2025, the number of people age 65 and older will grow by an estimated 74%. In contrast, the number of workers supporting the system in its current incarnation would grow by 14%, which some see as a threat to deplete its coffers completely. Sharply divided politicians are urging a potpourri of reforms, offering everything from restoring solvency with minimal changes to scrapping the system entirely.

The federal income tax, the other major cause of paycheck shrinkage, was created when the 16th Amendment to the U.S. Constitution was passed in 1913. The original federal income tax rates ranged from 1% to 7% of annual income above $3,000—a lot of money back then.

To pay for World War II, however, the government raised the income tax rates so dramatically that the tax on the top income level bracket hit a record of 94% in 1944 and 1945. The minimum income subject to taxation was lowered so that most working people were for the first time subject to some income tax.

Politicians, hoping to assuage the public angst over paying a large yearly lump sum, decided to lessen the trauma by making employers withhold the income tax, little by little, from workers’ pay each week.

By the 1970s, employees had become so accustomed to having large sums of money withheld from their pay that most states and cities—as well as nongovernment groups such as health insurance companies and pension fund managers—instituted additional with-holding programs.

Today, it is common for employees to have more than a third of their pay withheld by their employers on behalf of government, with still more withheld to finance private benefit plans.