Pre Tax Deduction

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Pre Tax Deduction

What is Pre-Tax Deduction?

Pre-Tax deductions are made from gross pay until any taxes are withheld. Pre-Tax deductions assist in lowering taxable income and taxes. It is also known as before-tax deductions.

Pre Tax Deductions are beneficial in terms of lessening the amount to be paid on your taxable income, say income tax lesser to be paid.

Every registered and legal business organization has to deal with some pre and post-tax deductions from the employees’ paychecks. The pre-tax deductions are those which are made prior to any tax withholdings. Such sort of deductions is beneficial for both employees and employers, that the taxable income reduces hence tax lowers as well.

Some pre-tax deductions exempt employees from federal, local, or even state taxes, and others do not. For example, adoption assistance is free from federal income tax but this exemption is not to be applied to Medicare, Social Security, and FUTA (Federal Unemployment Tax) taxes.

The items which are concurrent under the umbrella of pre-tax deductions by the government are as mentioned below:

  • Permissions of Parking
  • Benefits in terms of vision insurance plans
  • Funds related to Retirement
  • Insurance relating to life
  • Medical expense / Flexi-spending-accounts
  • Expenditure on childcare
  • Insurance covering dentist
  • Tax-deferred investment(s)
  • Disability long term and short term both
  • Saving in health accounts
  • Insurance of health care

Moreover, the state may change (add/subtract) all or any of the mentioned above items from time to time in the general public and state interest therefore it is advised that the updated lists may be checked on the US state department's official concerned websites.

From an HR perspective, we at WebHR advise you to inform such benefits of pre-tax deductions and the like amid onboarding so that the newcomers are well versed with the benefits administration they will have with you.   

So far as other taxes are concerned, you must know that the pre-tax deductions are beneficial for you in terms of lowering your taxable income. In other words, the employees will have to pay a lesser amount of tax in the domain of income tax. This also lowers the taxes for the employees like FICA Tax (Federal Insurance Contributions Act) – and FICA includes Medicare and Social Security; and for the employer, it reduces the taxes like FUTA - Federal Unemployment Tax, FICA (Federal Insurance Contribution Act), and SUI – State Unemployment Insurance tax.


What are common pre-tax deductions?

Following are common pre-tax deductions / contributions:

Some pre-tax deductions result in tax payments getting delayed. For example, the employees opting for 401 (k) plans are exempted from tax when they are in the job; but in the future, after retirement, if the funds are withdrawn from the retirement accounts then the tax is to be paid on transactions

Which taxes are under the umbrella of the employee withholding taxes?

Moreover, it is necessary for the HR department to know which types of taxes are under the domain of the employee withholding taxes, they are as mentioned below:

  • Federal Income Tax
  • State Income Tax
  • Applicable tax(es) at city, municipality, or country/state level (may differ from place to place as per legal bounding and requirement of that vicinity under the administrative control of the concerned department/division, etc.)
  • Employee’s share within FICA - Medicare and Social Security
  • SDI – State Disability Insurance, if requisite


What are the deductions under the domain of post-tax deductions then?

Following are the taxes which are under the dominion of post-tax deductions:

  • Roth 401 (k) – retirement plan by an employer - deductions after federal and state taxes
  • Dues of Union, charity, contributions: 529 college saving plans by employees – for education purpose
  • Garnishments of wages by the employer when employee owes to pay back installments on several plans like child support / financial commitments; etc.

Note: Employer must follow the updated information on state concerning website: IRS

It is mandatory to follow the said website link for the portions to be contributed by you and your employee and for how long. Which are pre-tax and post-tax deductions, how are they calculated, and every year anything within may change subject to several global as well as local social and economic scenarios, it is mandatory to abide by the state regulations so that your business does not suffer anything forbidden or illegitimate.

Related: Deduction, Before Tax Deduction, After Tax Deduction, Payroll Deduction, Employee Deductions