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Despite what the name might suggest, a homestead exemption isn’t some kind of dusty old prospector or settler law. Many states have these statutes on the books; they are designed to protect a primary residence from creditors in a bankruptcy filing.

If the Smiths file a Chapter 7 bankruptcy, how much equity they can protect with an exemption will be one of the factors determining whether they will be able to keep their home.

In a Chapter 13 bankruptcy, they won’t lose their home, but they will have to pay creditors an amount equal to the value of the property they can’t protect with an exemption, or their disposable income, whichever is more.
Before declaring bankruptcy, it’s best to consider the alternatives.

This guide will provide an overview of homestead exemptions as applied to bankruptcy, state by state.

What Is Homestead Exemption?

If you’re wondering what a homestead exemption is, it’s a provision in a state’s law that can legally protect a home from creditors in situations such as declaring bankruptcy or enduring the death of a homeowner’s spouse.

In these ways, a homestead exemption can both literally provide you with shelter (a roof over your head) and protection financially, possibly avoiding a situation in which you must lose your residence. That said, this exemption will not prevent foreclosure if a homeowner defaults on their mortgage.

You may be curious about what is the Homestead Act and if it’s the same thing as homestead exemption. They are two different things: The Homestead Act was an 1862 law that granted 160 acres of Western land in the U.S. to anyone who promised to farm it. It was designed to settle the West and drive economic growth.

What States Have a Homestead Exemption?

It’s easier to name the states that don’t have a homestead exemption than those that do since the vast majority of them offer this protection.

Currently, the only states without specific homestead exemptions are New Jersey and Pennsylvania. If you live in one of those states, then you have an idea of where you stand on potential shields with homestead exemptions — although other state and even federal homestead exemption provisions may potentially assist anyone, in any state.

If you live in any of the other 48 states, know that there are many more asterisks to hunt for, depending on your situation and financial plans.

Even if you live in a state that offers homestead exemptions, you may want to find ways to save money on your mortgage. These strategies, such as refinancing a home loan or requesting a new tax assessment, can help you weather financial storms by reducing your monthly payments.

Recommended: Understanding Bankruptcy: Is It Ever the Right Option?

Which State Has the Best Homestead Exemption?

It is true that some states are more favorable than others for seeking the exemption. But no state is literally “best” to homestead in. Many individual factors are worth weighing in your assessment of what — and where — is advantageous.

Before reading the following, an asterisk: Because homestead exemptions are protections for primary residences, you cannot claim an exemption on an investment property or vacation home.

Some states allow bankruptcy filers to use federal bankruptcy exemptions instead of the state exemptions.

The federal homestead exemption amount is calculated every three years. For the period from April 1, 2022, to March 31, 2025, it allows you to protect up to $27,900 of the equity in your home. In cases where you and your spouse file taxes separately, do not live together, maintain separate homesteads, or (according to at least one court) do not have a direct financial connection with each other, each spouse can claim a separate homestead, up to the amount allowed by an individual.

Also, most states allow a “wildcard” exemption, which allows you to protect any kind of property from bankruptcy proceedings. This can be of particular help if one or more of a debtor’s other exemptions falls short of protecting their equity. A wildcard exemption amount can be divided among multiple items.

As of April 1, 2022, the federal wildcard exemption is $1,475, plus up to $13,950 of any part of the federal homestead exemption that has not been used.

Since there’s so much variability in local, regional, and state codes and how they define the homestead exemption, it’s wise to consult local authorities or websites detailing the law’s specifics when you are in a situation that may trigger these laws.

Here’s a rundown of what you might call homestead states that offer some of the strongest protections via exemptions. “Strongest” here is being interpreted as either affordances for high exemptions or greater flexibilities in the law — but other factors, such as cost of living, should also be a consideration:

1. California. California has two systems for the homestead exemption. Under one system, homeowners can exempt up to $600,000 of equity in a house. In the other system, they can exempt up to $31,950 of home equity. Determining what you can access requires research and/or legal counsel.

2. Florida. Under the Florida exemption system “homeowners may exempt an unlimited amount of value in their home or other property covered by the homestead exemption. However, the property cannot be larger than half an acre in a municipality or 160 acres elsewhere.” The exemption can also be claimed by the spouse or children of a deceased owner.

3. Iowa. An unlimited value in one home or a one-unit apartment can be sought in protection. The property must be in a city or town and is limited to one-half acre or 40 acres elsewhere.

4. Kansas. An unlimited amount of value can be sought in protection, but homeowners are limited in the amount of land they can protect. Homeowners can protect up to 1 acre of property if they live within city limits or up to 160 acres of farmland.

5. Minnesota. You can protect up to $450,000 of equity in your home and land or up to $1,125,000 of equity if your land (up to 160 acres) is used for agricultural purposes.

6. Oklahoma. Residents can exempt the entire value of their homes, but the homestead can’t be larger than a half acre if you live in a city, town, or village or up to 160 acres if you live elsewhere. (If you use more than 25% of the total square footage of your property for business, your exemption is limited to $5,000.)

7. Rhode Island. The exemption applies for up to $500,000 of equity.

8. South Dakota. If your home is less than 1 acre in a town or 160 acres in any other type of area, all of your equity is exempt.

9. Texas. For residences on 10 acres or less in a city, town, or village or 100 acres or less in the country, Texas offers an unlimited homestead exemption.

10. Washington. This state’s generous homestead exemption varies depending on the county the homeowner lives in, from $172,900 in Ferry to $729,600 in King County, where Seattle is.

Recommended: Getting Approved for a Personal Loan After Bankruptcy

Homestead Exemptions in Other States

Here’s all the rest of the states and what homestead exemptions they offer:

1. Alabama. The Alabama Department of Revenue indicates that at the state level, homestead exemptions have a maximum value of $16,450. It only applies on land area that is not more than 160 acres.

2. Alaska. Homeowners may exempt up to $72,900 of their home or other property covered by the homestead exemption.

3. Arizona. Homeowners can exempt up to $250,000 for a house and the land it’s on, a cooperative or condominium, a mobile home and the land it’s on, provided the person lives in the dwelling.

4. Arkansas. You can seek an unlimited amount of equity in 80 rural acres or one-quarter of an urban acre.

5. Colorado. Up to $75,000 of equity in a home or other property, such as a mobile home, is protected. The amount increases to $105,000 if the homeowner, spouse, or dependent is disabled or 60 or older.

6. Connecticut. The state of Connecticut protects up to $75,000 of equity in real property, a co-op, or a manufactured home occupied at the time of filing bankruptcy. The exemption rises to $125,000 if a creditor is collecting for hospital costs.

7. Delaware. Exempts up to $125,000 in real property or a manufactured home that was used as a principal residence.

8. Georgia. Homeowners may exempt up to $21,500 of their home or other property covered by the exemption (the amount increases to $43,000 for married filers). They can also apply $10,000 of any unused portion of the exemption to another property they own — a “wildcard” exemption.

9. Hawaii. If you’re the head of a household or over 65, you can exempt up to $30,000 of equity. If you’re not the head of the family, you may protect up to $20,000 of equity in your home.

10. Idaho. A filer can protect up to $175,000 in equity in a home or mobile home.

11. Illinois. Protects up to $15,000 in equity in your home, which includes a farm, mobile home, lot with buildings, condominium, or cooperative.

Recommended: How Often Can You Refinance Your Home?

12. Indiana. A debtor can exempt up to $19,300 in real estate or personal property used as a residence. In addition, if you are married and filing jointly, that figure rises to $38,900.

13. Kentucky. Up to $5,000 of equity can be claimed.

14. Louisiana. Homeowners are allowed to exempt up to $35,000 of home equity, and more if their debts were due to what’s considered a catastrophic or terminal illness or injury.

15. Maine. Up to $80,000 of equity in property used as a residence can be claimed. The amount can be increased to $160,000 in equity if you have a minor dependent residing with you, or if you are 60 or older or disabled.

16. Maryland. Exempts residential property value up to $25,150 (husband and wife may not double).

17. Massachusetts. The state automatically protects up to $125,000 in home equity, and up to $500,000 for those who file and receive the increased exemption (this amount also applies to the elderly or disabled).

18. Michigan. Each homeowner and their dependents can exempt up to $40,475 in a property covered by the homestead exemption. If the homeowner is 65 or older or disabled, the exemption amount increases to $60,725.

19. Mississippi. An exemption of up to $75,000 of equity in the real estate you live in can be claimed, as long as the property is less than 160 acres.

20. Missouri. You can exempt up to $15,000 of equity in the real estate in which you live or will live, and spouses who file a joint bankruptcy can double the exemption.

21. Montana. Up to $350,000 in equity can be protected as applied to up to 320 farm acres, a quarter of a city acre, or one residential acre outside a municipality.

22. Nebraska. Up to $60,000 can be protected on a home, provided the owner is either a head of household, married, or over age 65, and the property does not exceed 160 acres.

Recommended: How Much Does It Cost to Refinance a Mortgage?

23. Nevada. Up to $605,000 in equity in a home can be claimed.

24. New Hampshire. You can protect up to $120,000 in equity.

25. New Mexico. Up to $60,000 of equity in your home can be protected; that increases to $120,000 being available to spouses who co-own property.

26. New York. The homestead exemption amount varies greatly depending on the county. If the property is in the counties of Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, or Putnam, the exemption is $179,950. If the property is in the counties of Dutchess, Albany, Columbia, Orange, Saratoga, or Ulster, the exemption amount is $149,975. For any other county in the state, the exemption amount is $89,975.

27. North Carolina. Homeowners may exempt up to $35,000 of their home or other personal property. Homeowners who are 65 or older whose spouse is deceased may exempt up to $60,000, provided the property was previously owned by the debtor as a tenant by the entirety or as a joint tenant with rights of survivorship.

28. North Dakota. Homeowners can protect up to $100,000 of equity in their home when declaring bankruptcy.

29. Ohio. The state allows for the protection of up to $145,425 of equity as part of the homestead exemption. Spouses who file a joint bankruptcy may double that amount.

30. Oregon. A property owner may be exempt up to $40,000. Married couples, however, may be exempt up to $50,000.

31. South Carolina. The state’s law protects up to $63,250 in equity in a home or real estate used as a residence, with spouses who file a joint bankruptcy being able to double the exemption.

32. Tennessee. Homeowners can exempt up to $5,000 of equity — and that amount goes up to $7,500 for joint owners and $25,000 if there’s at least one minor child who is a dependent. People 62 and older can exempt up to $12,500 of equity in their home—$20,000 if married, and $25,000 if the spouse is also 62 or older.

33. Utah. Homeowners may exempt up to $43,300 to protect their home, provided it is their primary personal residence.

34. Vermont. An exemption up to $125,000 of the equity in a home, condo, or mobile home can be claimed; it can’t be doubled, however, in cases of joint bankruptcy filing.

35. Virginia. This state allows for protection of $5,000 of real estate or personal property as a “wildcard” exemption. That number doubles to $10,000 if the individual is age 65 or older.

36. West Virginia. Homeowners may exempt up to $35,000 of their home or other property. That figure increases to $70,000 if you are married, you and your spouse both own the property, and you file bankruptcy together.

37. Wisconsin. A single person can protect up to $75,000 of equity in a home; spouses can double the amount to $150,000.

38. Wyoming. In this state, up to $20,000 of equity in a home can be shielded from bankruptcy. This can double if you are married, you and your partner own the property together, and you file for bankruptcy jointly.

Still with us? If you don’t see a state listed above, that means it’s one of the two (New Jersey or Pennsylvania) that doesn’t offer any homestead exemptions for use in a bankruptcy filing.

The Takeaway

Homestead exemption rules can help protect your home in instances of a bankruptcy filing and can be very helpful during a difficult time. These guidelines differ greatly by state, but are worth investigating. If you can’t keep your head above financial water, these exemptions may allow you to keep your home.

Refinancing a mortgage may also provide some relief to a struggling homeowner. In addition to offering an array of mortgage loans, SoFi also can help you refinance at competitive rates and with a hassle-free process.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOHL-Q424-150

Sometimes, home sweet home is right under our nose. Buying a house from a relative may be the perfect solution, but everyone should be aware of how to negotiate and seal the deal.

An adult child may have her heart set on buying her parents’ home because of the memories it holds. Another might want to purchase Grandma’s home so he can retire in Florida. Others may have a relative who wants to give them a good deal.

Whatever the case, if you’re buying a house from family, you’ll want a harmonious handoff.

Buying a House From a Relative

It’s important to understand the home-buying process before making any real estate purchase.

And knowing what is needed to buy a home is useful before, erm, buying a home.

Buying a house from family, though, is a bit different than a deal between strangers. First of all, whether you’re a first-time homebuyer or not, it’s important to consider how crafting the deal can affect familial relationships.

Not hiring real estate agents might keep negotiations and planning all in the … family. If that’s the case, it’s a good idea to have regular check-ins to ensure that both parties feel good about the next steps and are ready to move forward.

It can be helpful to take notes about the arrangement after an initial meeting and make a copy for everyone involved so that all important details are in writing and available for review. That way, everyone is clear on what is expected of them.

Do We Need Real Estate Agents and Other Pros?

Even though buying a house from family is a personal affair, it can be helpful to bring in professionals to make sure the process goes smoothly, everything is done legally, and both parties walk away feeling satisfied and respected.

A lawyer or real estate agent can help make sure the purchase contract is done properly, state-required property disclosures are made, and the house sells for fair market value — what the property would sell for on the open market.

A title company can protect the buyer from any liens and ensure that no one else has a claim on the home. Even with a high level of trust between family members, this can be a smart step to take to protect the buyer.

And it can be helpful to consult a tax professional in order to be aware of any tax implications of the agreement.

Determine the Purchase Price

Deciding on the fair market value can be done by reviewing the sales price of recently sold comparable properties in the area of the home, or by hiring an appraiser to conduct an objective property valuation. Keep in mind that lenders usually require an appraisal.

Once both parties have an idea of the market value, they can decide how much the buyer will pay. In some cases, this will be the fair market value. In other scenarios, a family member may offer to pay closing costs, or provide a cash gift or gift of equity (described below).

Draw Up the Purchase Agreement

When both parties are ready to move forward, it’s time to draw up a purchase agreement. The legally binding real estate purchase contract will outline the price and payment terms.

Buyers who need a home loan can send the contract to their lender when applying for a mortgage.

Prepare for Scrutiny

There are two main types of real estate transactions: arm’s length and non-arm’s length.

In an arm’s-length transaction, the buyer and seller do not have a relationship and are acting in their own self-interest.

When someone buys a home from a family member, it’s a non-arm’s-length transaction. These deals may be subject to more scrutiny because the chance of mortgage fraud increases.

The sale price of the home must equate to what it would be between strangers unless a gift of equity is on the table.

A heads-up for anyone whose elder family member needs to go to an assisted living facility or nursing home and plans to fund their stay with Medicaid: To prevent Medicaid applicants from simply giving away a home or other resources to qualify for the low-income medical program, the federal government has a “look-back period” of five years. The exception is California, which has a 2.5-year look-back period that is gradually being phased out and will be eliminated by July 2026. A Medicaid applicant is penalized if assets were gifted or sold for less than fair market value during that time.

Know How the Gift of Equity Works

One thing sellers may want to consider is giving the relative a gift of equity, or selling for less than fair market value.

The maximum amount of the discount without reporting it as a gift to the IRS is $19,000 per recipient in 2025.

Spouses “splitting” gifts may each contribute $19,000 a year. Spouses splitting gifts must always report the gift. You and the seller can learn more about gift taxes on the IRS website.

That doesn’t mean sellers have to pay a gift tax; they can apply it to their lifetime gift exclusion. The lifetime gift and estate tax exemption is $13.99 million, or $27.98 million for a couple, in 2025.

So for the vast majority of people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. Homeownership in general helps build generational wealth.

Here’s another plus for buyers: Most lenders allow the gift to count as a down payment.

A lender will require a gift letter signed by the sellers for a cash gift or a gift of equity sale. The letter will confirm that the gift is not a loan.

Know How to Finance the Home

When buying a home from a family member, many buyers will still need to take out a home loan. Even with a discount or a special offer from a family member, it can be hard to purchase a home outright.

Go with a mortgage broker or direct lender? Each has pluses and minuses.

Any mortgage loan officer or broker should be willing to answer your mortgage questions, including those about fees, points, and mortgage insurance.

Weighing different types of mortgage loans (including conventional conforming mortgages, jumbo loans, and government-backed loans) and loan terms (usually 30 years) can help you make a more informed decision.

After applying for mortgages, you’ll receive loan estimates. It’s important to compare mortgage APRs, fees, and closing costs.

After you choose a mortgage and close on the home, your mortgage servicing outfit will handle your payments.

The Takeaway

How to buy a house from a family member? For starters, consider calling in professionals, including a lawyer to help draft a contract. And make sure you and the seller understand how the gift of equity process works. But when everyone is well informed, buying a house from a relative can be seamless.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

About the author

Jacqueline DeMarco

Jacqueline DeMarco is a freelance writer who specializes in financial topics. Her first job out of college was in the financial industry, and it was there she gained a passion for helping others understand tricky financial topics. Read full bio.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q424-128

Payroll deductions are amounts of money that are taken out of your gross pay, leaving you with net (or take-home) pay. Common types of payroll deductions include taxes, retirement savings, and Social Security contributions, among others. However, it can be confusing (and sometimes a little discouraging) to see how much money comes out before you have cash in hand.

Here, take a closer look at the deductions that are required by law and are out of your control, as well as others that are part of your employee benefits package, which means that you may be able to adjust them. This paycheck breakdown can help you understand more about where your money goes so you can manage it better.

What is Net Pay?

Whether you’re paid hourly or by salary, your rate of pay is the compensation that you and your employer agreed upon when you accepted the job. That said, it’s typically expressed as your annual salary for full-time employees.

This number appears in official contracts and is referred to as your gross pay. However, it does not represent the actual amount that you will be paid.

Net pay, also referred to as take-home pay, is the compensation that is paid out via check or direct deposit to an employee. It is your gross pay with all the deductions taken out, which can make you think, “Wait, where’d my money go?” when it hits your checking account.

What Are Payroll Deductions?

So, to answer that question: Here’s where your money goes before it lands in your checking account:

•   Mandatory deductions: By law, an employer must subtract various mandatory federal and state tax withholdings.

•   Elective deductions: Employers will also subtract costs for employer-sponsored offerings that the employee takes part in, such as healthcare, life insurance, and retirement.

Whether required or optional, these are pulled out of your gross pay and applied where needed. While you may feel disappointed to see these funds siphoned off, they have an upside. They are saving you from owing major taxes come April 15, and they are potentially helping provide important elements of financial fitness, like saving for your future. This knowledge can be reassuring, especially if you are filing taxes for the first time, and are feeling a bit shocked about the difference between your gross and net pay on an annual basis.

How Do Payroll Deductions Work?

As mentioned above, payroll deductions may be required, such as federal or any state taxes, or they may be optional (say, a 401(k) plan or health insurance). The mandatory and elective deductions are subtracted from your paycheck’s gross pay amount.

What remains after these payroll deductions is your net pay. This is the amount that is paid to you. You can typically see a breakdown of exactly what has been subtracted from your compensation by looking at your paystub. If you are paid via direct deposit, you will likely find this information online at your employer’s portal. If you receive a paper paycheck, the paystub is often attached.

Types of Payroll Deductions

As you look at your paystub and see all the deductions that are being taken out of your gross pay, you may want a bit of help understanding what’s what. Below are explanations of some of the most common paycheck deductions:

Federal Taxes

Federal taxes include all the taxes you are required by law to pay to the federal government. These taxes (which are often referred to as being withheld vs. paid) help fund the federal government, allowing them to invest in things such as infrastructure, education, and national defense, and provide services to the American people.

It’s common to wonder what tax withholding is and how much must you allocate towards it. When you were first hired, you likely filled out an Employee’s Withholding Certificate or W-4 form form and claimed the number of tax exemptions you have. This amount tells the federal government how much money to take out of each paycheck to cover your taxes. The more allowances you take, the less federal income tax the government will take out of your paycheck.

One way to ensure that you have the right amount of tax withheld for each pay period is to use the Internal Revenue Service’s IRS Tax Withholding Estimator or speak with someone in your company’s HR department. You can tell them if you’re single or married, how many dependents you have, and if you have any other sources of income, and they should be able to help you fill out your form accurately.

It’s also a good practice to revisit your IRS Form W-4 selections annually as significant life events may change your withholding and also because the W-4 form is periodically updated. It can be wise to think about your exemptions regularly

During tax season of each year, individuals who have overpaid in federal taxes receive a refund from the government. Those who’ve underpaid, however, are required to pay additional funds and possibly a penalty.

State and Local Income Taxes

There are other types of taxes that will possibly be withheld from your gross pay. Many states require a state tax to help fund government projects and services. To learn more about your state’s taxation policy, you can look at this map for details.

Just as with federal taxes, your state income tax will get deducted from your paycheck to cover taxes you may owe at the end of the year.

Social Security and Medicare

Another common paycheck deduction you’ll see: Social Security and Medicare taxes that are part of the Federal Insurance Contributions Act (FICA) tax, a group of payroll taxes collected from both the employer and the employee. As the name implies, these taxes fund our nation’s Social Security and Medicare programs, helping with income and insurance needs once you reach retirement age.

The tax rate for social security is currently 6.2%, and Medicare receives an additional 1.45% (employers match these tax rates, bringing the total of FICA tax contributions to 15.3%).

Wage Garnishments

Another possible payroll deduction to know about: wage garnishments. These are legal procedures designed to repay delinquent, outstanding debts, such as unpaid child support, overdue credit card payments, or even unpaid taxes.

Most wage garnishments are initiated by court order. However, the IRS and other tax collection agencies also levy for unpaid taxes in the form of wage garnishment.

Garnishments are made on earnings leftover after all legally required deductions are made. The actual amount of any garnishment will depend on the amount of debt owed and income earned.

Employee Benefits

Depending on where you work, you may be able to opt into a variety of benefits. Typically, these costs are automatically deducted from your paycheck.

If you sign up for your employer-provided health insurance, at least some of the cost is likely to be a type of paycheck deduction.

Under the Affordable Care Act, employers with 50 employees or more must offer affordable health insurance. As part of an employee’s compensation package, many companies will pay half, or another percentage, of the insurance premiums. The employee’s portion of those premiums is represented on a pay stub as a deduction.

Other benefits, like flexible spending plans, commuter plans, and life insurance, may also be deducted from your pay, depending on whether or not you opt into them and if your employer picks up the bill fully or partially.

Health insurance and other benefits typically come out before your taxes, and you may be able to reduce your taxable income by signing up for them.

Retirement Contributions

Employee 401(k) savings plans are a common benefit offered in the workforce.

If you opt into this benefit, your employer will deduct funds from your wage earnings and deposit them into a retirement account. (How much of your paycheck should you save? Experts often recommend 20% should go towards saving for retirement and other short- and long-term goals.)

Employees are typically able to choose the amount they would like deducted from their earnings for retirement savings. In some cases, employers may contribute an additional percentage of your salary into your retirement account.

Contributions to your 401(k) can not only help you save for the future but also lower your taxable income, since they come out of your paycheck before taxes get assessed.

You’ll want to keep in mind, however, that there are yearly retirement plan contribution limits set by the federal government through the IRS.

Other Common Payroll Deductions

Depending on your workplace and career, other payroll deductions are possible. Among the ones you may find are:

•   Charitable giving plans

•   Payment for job-required items, such as tools or uniforms

•   Union dues

•   Professional certification or tuition fee deductions

Examples of Payroll Deductions

You’ve learned details about many types of payroll deductions above. In list form, examples of payroll deductions include:

•   Federal income tax

•   State and local income taxes

•   Social Security and Medicare taxes

•   Wage garnishments

•   Employee benefits

•   Retirement contributions

Steps to Calculate Payroll Deductions

Calculating payroll deductions is typically something done by employers, not employees. Here’s a quick overview of how the process typically works:

1.    Obtain a W-4 from employees indicating their withholding.

2.    Determine employees’ gross earnings, whether salary pay or hourly.

3.    Calculate any overtime for those employees who are not exempt and worked over 40 hours a week.

4.    Take any pre-tax deductions.

5.    Calculate and deduct federal income tax based on pay, withholding status, what tax bracket an employee is in, and other factors.

6.    Determine and deduct Social Security and Medicare payments.

7.    Calculate and deduct any state and local taxes.

8.    Take any other deductions, and move funds to the appropriate entity.

Tips to Manage Payroll Deductions

If you are an employee seeking to tweak your deductions, you will have a few options. You might update your W-4 to reflect more or fewer exemptions, depending on whether you want to reduce or increase the taxes withheld.

In addition, if you could use some breathing room in your budget during a financial crunch, you might decrease retirement contributions a notch to free up a little more money for bills.

If you are in a position to be managing payroll deductions, consider these tips for making the process run smoothly:

•   Develop organizational systems to manage forms, deadlines, and other aspects of the process. There are many digital and online tools you can use for this.

•   Keep up to date with federal, state, and local tax laws to make sure you are deducting the proper amounts; know the guidelines about, say, equal pay provisions; and more.

•   Automate the entire process with payroll software. This can save time and boost accuracy versus doing things by hand. Or consider outsourcing the responsibilities to an external agency.

•   Regularly update training for payroll and HR teams, if you employ them.

•   Don’t touch payroll taxes that are only paid quarterly. It may be tempting to dip into those funds before they are due and use them for other business expenses, but this is a very risky path to pursue. If you wind up being short when the taxes must be paid, you could face penalties.

Recommended: 50/30/20 Budget Calculator

The Takeaway

While you may be surprised to see all the deductions coming out of your paycheck, once you know what number to expect to see landing in your bank account each pay period, you’ll be able to plan your spending and budget accordingly. Deductions can include those you can’t change, such as taxes, and those that you may be able to alter, such as retirement contributions.

It’s a good idea to check your pay stubs periodically to ensure that the deductions being taken out are accurate and align with your financial goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What are some common incorrect payroll deductions?

Examples of incorrect employee payroll deductions are expenses that have to do with running the business, workers’ compensation premiums, and some personal protective gear costs. In addition, payroll deductions should not bring an employee’s income below minimum wage.

How do I report payroll deductions?

If you are an employee, your payroll deductions will be reflected in the end-of-year W-2 form that you receive. If you are an employer, you are likely filing IRS Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, which shows the wages you’ve paid and various taxes withheld.

Recommended: IRS Form 941 Explained

What are the pros and cons of payroll deductions?

Payroll deductions are a fact of life. On the plus side, they whisk away taxes regularly so you don’t face a huge tax bill come April 15, and the money paid in taxes can help quality of life in America. Also, deductions like health insurance and retirement savings go towards achieving financial security. The main con, of course, is that you take home less pay than your gross earnings and may need to budget wisely to balance your spending and saving.

What are the categories of payroll deductions?

The main categories of payroll deductions are federal, state, and local taxes; Social Security and Medicare; employee benefits; and retirement contributions.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.