What Are Source Deductions?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 11 April 2019
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Source deductions are funds withheld from a paycheck by an employer by law or by an agreement with an employee. Some examples can include taxes and voluntary pension contributions. They are also known as withholdings. Employers are required to keep them in trust, submitting them periodically to the government, and must issue statements to the employee and the government about how much was withheld in a given tax year so people can calculate their tax bills and determine how much they owe.

Laws in many nations requires employers to take out source deductions before issuing pay to ensure that taxes are collected in a timely fashion. The amount withheld can depend on an employee’s tax bracket, and can include national and regional taxes as well as contributions to disability or retirement programs maintained by the government. Employees can determine the amount of their source deductions by filling out a declaration form or receiving a tax card with information about their tax liability.

In addition, employers can take out further source deductions by agreement with the employee. Employees may choose to contribute to health insurance or pension funds through payroll deductions, and they can also pay union dues through their paychecks. A contract must stipulate the specifics of the agreement and provide information about the nature of the source deductions to confirm that the employee consents and understands how much money will be withheld from each paycheck.


There is the potential for fraud with source deductions. One issue can be a situation where an employer takes the money, but doesn’t forward it to the appropriate recipient, such as a government tax agency. In addition, employers could conspire with employees to withhold the minimum allowable amount by falsifying deduction information, allowing people to get larger paychecks. Employees will subsequently owe on their taxes because not enough was withheld.

Government agencies have the power to audit businesses for cases of suspected fraud with source deductions and other tax matters. They can demand that the monies be repaid promptly and may fine businesses as well. With situations like insurance, employees should be aware that their coverage may lapse if the employer doesn’t pay, and it can be important to periodically check to make sure these payments are going through. If they are not, the employee can discuss the situation to determine if it is possible to resolve, or can take the employer to court for compensation.



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