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In this lecture, payroll deduction is defined as amounts withheld from an employee's gross pay, referred to as withholdings. Key examples of payroll deductions include federal income tax and FICA taxes, which cover Social Security and Medicare. Additionally, deductions may include contributions for benefits like retirement plans and insurance. The process is illustrated by showing the gross pay the employee earns and the subsequent deductions, such as FICA taxes and federal income tax, which ultimately determine the net pay the employee receives after all applicable withholdings.