What Is the Difference Between Pre-Tax Deductions and Post-Tax Deductions?
Every payroll deduction fits into one of two categories: pre-tax deductions or post-tax deductions. Some deductions are required by law to fall into one category, others are a matter of choice.
Pre-tax deductions are taken from an employee’s paycheck before any taxes are withdrawn. Because they are removed from gross pay, pre-tax deductions reduce an employee’s taxable income and the amount of money the employee owes in payroll taxes. However, some benefits funded by pre-tax contributions could be subject to taxes at another time, such as when an employee prematurely withdraws funds from a 401(k).
Common pre-tax deductions include:
- Health and Medical Insurance - Most group health insurance plans allow for premiums to be withdrawn pre-tax.
- 401(k) contributions - plans allow for pre-tax contributions.
- Commuter benefits - Many cities offer discounts on rail or bus tickets that can be paid with pre-tax dollars.
- Life Insurance - Like health insurance, life insurance premiums can usually be deducted pre-tax.
Post-tax deductions are taken from an employee’s paycheck after all required taxes have been withdrawn. Because they are removed from post-tax wages, they do not reduce the employee’s overall tax burden.
Common post-tax deductions include:
- Garnishments - Court-ordered withholdings, whether for child support, court fees or loan repayment, are withdrawn after taxes.
- Roth IRA contributions - must be funded with post-tax deductions, and 401(k)s can be if the employer so chooses.
- Disability insurance - If disability insurance is paid by the employee—not the employer—then it is most often withdrawn after taxes.