Pre-tax deductions are deductions taken from an employees gross pay before taxes are withheld from the paycheck. These deductions reduce the employees taxable income, meaning they will owe less income tax. They may also owe less FICA tax, including Social Security and Medicare. Pre-tax deductions can include contributions to retirement plans such as 401(k) plans, health insurance premiums, and flexible spending accounts. Other examples of pre-tax deductions include group-term life insurance, disability insurance, and wage garnishments.
Pre-tax deductions are beneficial to both employees and employers. Using a pre-tax deduction plan allows employees to get coverages and benefits like medical care and life insurance before gross income is taxed. This reduces the employee’s taxable income and usually saves them money over time. The employee will often pay less for health coverage than they would if they bought a private plan with after-tax dollars. Pre-tax deductions also lower the employers payroll taxes, such as the Federal Unemployment Tax (FUTA), FICA, and SUI.
It is important to note that pre-tax deductions are different from post-tax deductions. Post-tax deductions are taken from an employees paycheck after taxes are withheld and do not reduce the amount of taxes that an employee must pay to state or federal entities.
Examples of pre-tax deductions include:
- Medical and dental benefits
- 401(k) contributions
- Health insurance premiums
- Flexible spending accounts
- Group-term life insurance
- Disability insurance
- Wage garnishments
Employers should consult with tax and legal advisors to ensure compliance with all laws and regulations regarding pre-tax deductions.
