A pre-tax deduction is an amount withheld from an employee’s paycheck each pay period. These deductions are taken from an employee’s gross income before taxes are withheld, resulting in the employee’s net income. Pre-tax deductions reduce an employee’s liability for federal income tax and individual taxes such as the Federal Insurance Contributions Act (FICA) tax. Pre-tax payroll deductions also help employers and small businesses manage paying federal unemployment taxes and FICA taxes to the federal government.
Some common pre-tax deductions include:
- Commuter benefits that pay for transportation to and from work
- Retirement plans such as a 401k retirement account
- Health benefits such as health savings accounts and flexible spending accounts
- Savings plans where an employee pays in to a dedicated savings fund
It can be easy to confuse whether certain deductions should be withheld pre tax or post tax. In a post-tax deduction, the employer withholds a deduction after taxes have already been withheld for a pay period. This does not impact the employee’s net pay.
Ascentis’ powerful payroll software can help you manage all your payroll deduction planning and execution.