What Are Pre-Tax and Post-Tax Deductions? Understanding The Ins and Outs of Your Paycheck Deductions
Written by
Kathryn Jackson
Edited by
Zuri Anderson
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Understanding how paycheck deductions work can make it easier to manage finances and ensure the correct amount of take-home pay is received. This is essential for making informed decisions about benefits, savings and overall financial planning.
It’s important to understand pre-tax and post-tax deductions because they affect where paycheck funds go, including take-home pay.
Pre-Tax Deductions
Pre-tax deductions, such as contributions to retirement plans or health insurance premiums, are taken out of paychecks before taxes are calculated, lowering the taxable income and reducing the overall tax liability. Be sure to check for limitations and qualifications on benefits from employers, like in an employee handbook or information packet.
Health Insurance Premiums
Employees who enroll in health insurance through their employer pay their portion of health insurance premiums through pre-tax payroll deductions. The health plan selected, level of coverage and amount that an employer contributes dictates the amount of money that employee needs to pay towards the insurance premium.
Retirement Contributions
Retirement plans like SIMPLE IRAs and 401(k) plans are examples of pre-tax contributions. Employees determine the amount of their contribution and how the money will be invested, such as in mutual funds, stocks and bonds. The amount deducted depends on the employee’s contribution rate and whether the employer matches contributions.
Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA)
HSAs and FSAs are additional benefits that employers may offer, which are funded by pre-tax payroll deductions. HSAs and FSAs may be available to employees depending on the type of health insurance coverage. Employees can use these accounts to save money for qualified medical expenses.
Dependent Care Benefits
Employees can save money for eligible dependent care expenses including after-school programs and childcare. Employers may include the dependent care assistance programs (DCAPs) in a benefits package for employees, but the employer’s policy will determine the pre-tax paycheck deduction that will go to dependent care. Employees must meet specific qualifications to be eligible for dependent care benefits.
Commuter BenefitsÂ
Transportation or commuter benefits may be offered to employees to cover the costs of public transportation, carpooling or even bicycle commuting. The employer’s policy will determine the amount to be deducted before taxes for the employee’s contribution to this benefit.
Post-Tax Deductions
Post-tax deductions are taken out after taxes have been applied, meaning they don’t impact the taxable income but still affect a person’s net pay. Here are some that appear on paychecks.
Insurance Premiums
Many employees opt to have various insurance premiums deducted post-tax in order to increase the tax-free amounts received in payouts. These include life insurance, disability insurance and other voluntary plans.
Retirement Contributions
Roth IRAs (individual retirement accounts) are a type of retirement contribution that require a post-tax deduction. This allows the employee to be able to receive tax-free withdrawals during retirement.
Wage Garnishments
This post-tax deduction is a type of court order that requires the employer to withhold a certain amount of the employee’s paycheck to pay fines or debts, like student loans or unpaid taxes.
Child Support and Alimony Deductions
Court-ordered payments to dependents or ex-spouses are considered post-tax wage garnishments. The Office of Child Support Enforcement uses state-specific regulations to ensure compliance. An employee’s income can have its deductions capped at 50% to 65%.
Charitable Contributions
An employee can authorize a deduction for a contribution to a charitable organization, which will be sent directly to the charity. It is important to remember that even though a charitable contribution can be made as a post-tax deduction, it may also still be tax-deductible on individual tax returns.
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