What are deductions?¶

A deduction is an amount taken out of an employee's pay before they are paid. You start with the gross pay — the full amount the employee earns for the period — and you take one or more amounts out. What is left is the net pay, the amount the employee actually receives.

Not all deductions are the same. Some are amounts you must take out and send on to someone else. Others are amounts the employee has agreed to, or that a law requires.

In one line

A deduction is an amount taken out of gross pay before the employee is paid. Gross pay minus deductions equals net pay.

Why this matters¶

Employees often ask why their pay is less than the rate they agreed to. The answer is the deductions. Knowing what a deduction is — and that there are different kinds — helps you explain a payslip and know which amounts you are allowed to take out.

What you will learn¶

What a deduction is
The difference between deductions you must withhold and other deductions
How gross pay minus deductions gives net pay

Understanding the concept¶

A deduction is any amount taken from the gross pay before the employee is paid. There are two broad kinds.

1. Amounts you must withhold. The main one is PAYG withholding. PAYG stands for pay as you go. The ATO requires the employer to withhold an amount of tax from the employee's pay and send it to the Australian Taxation Office (ATO). This is not optional — it goes towards the employee's tax for the year.

2. Other deductions the employee has authorised or the law requires. Fair Work explains that an employer can also take an amount out when the employee has agreed to it in writing and it is mainly for the employee's benefit, or when a law or a court order requires it. Examples include an extra payment into the employee's super fund that they have asked for, or a child support amount a government agency has directed you to take out.

Once every deduction is taken from the gross pay, the amount left over is the net pay — the take-home amount that lands in the employee's bank account.

For accountants & bookkeepers

The two kinds sit on different legal footings. PAYG withholding is a tax obligation the ATO administers. The "other" deductions are governed by Fair Work rules: an employee-authorised deduction must be in writing, genuine, and mainly for the employee's benefit; deductions required by a law or a court order (such as a garnishee order) sit outside that consent test.

Example¶

Sam earns a gross amount for the fortnight. The employer works out the PAYG withholding on that gross amount and takes it out — this must be sent to the ATO. Sam has also asked, in writing, for an extra amount to go into their super fund each pay, so that amount is taken out too. Whatever is left after both deductions is Sam's net pay, which is paid into Sam's bank account. The payslip lists each deduction so Sam can see how the gross and net numbers connect.

Common mistakes¶

Treating gross pay as take-home pay — the take-home amount is the net pay.
Thinking every deduction is optional — PAYG withholding must be taken out.
Taking out an "other" deduction the employee has not authorised in writing.
Forgetting that deductions are taken from gross pay, not added on top.

How this works in myaccountant¶

In the app — when you run a pay run, myaccountant works out the PAYG withholding for each employee automatically. You can also add other deductions as pay items on an employee's pay. Every deduction appears on the payslip you can email to the employee, so the gross pay, the deductions, and the net pay all line up.

Key points¶

A deduction is an amount taken from gross pay before the employee is paid.
Gross pay minus deductions equals net pay.
Some deductions you must withhold — mainly PAYG withholding, sent to the ATO.
Other deductions need the employee's written agreement or a legal requirement.
The payslip should show each deduction.

Learn next¶

General information only — not tax, super or financial advice.

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