What is Pre-Tax Deduction in Human Resources?

Payroll management is beyond just handing checks to employees based on the hours they have worked and the experience that they have. While calculating payroll, you must know the total amount of deductions applicable to each employee. The payroll deductions include pre-tax and post-tax deductions, also known as after-tax deductions.

It is essential to keep in mind the difference between post-tax and pre-tax deductions. Therefore, this blog will address that and cover post-tax deductions in detail.

After-tax Deduction

Post-tax deductions are cut from the paycheck of an employee post all the taxes have been deducted to pay for taxes, benefits, or other financial obligations.

Let’s consider an example to have an understanding of what is the difference between pre and post-tax deductions.

An employee named Alex has joined your company as a software developer and may have health insurance, and child support deductions are taken from his check. The health insurance will fall under the category of a pre-tax deduction, while the child support deduction will be post-tax.

To calculate the payroll and income taxes to withhold, you would multiply an employee’s taxable income by the applicable percentage, which is pre-defined by the state or local authority.

Unlike the pre-tax deduction, it is up to the employee to participate in the post-tax deduction.

Types of Post-tax Deductions

Employers can offer employers many post-tax deductions, including wage garnishments, Roth 401(k) plans, employer-sponsored retirement plans, union dues, disability, insurance policies, flexible spending accounts, and donations.

However, this blog will discuss standard post-tax deductions.

Retirement Plans

Some retirement plans are considered pre-tax, but that’s not the only option. For example, when employees pay a retirement contribution into an account after income taxes are deducted from their paycheck is considered post-tax.

Employers offer many different retirement savings options, but the most common types of post-tax retirement accounts are a Roth IRA and a 401(k).

Employee contributions to a 401(k) are subject to FICA taxes but are deferred for federal income tax and most state income taxes. Contrarily, post-tax deductions make for IRA contributions.

Garnishments

Wage garnishment occurs in the case of the court, regulatory agencies, and IRS giving orders to an employer to deduct an employee’s earnings to cover unpaid taxes, child support, or defaulted loans. It’s a post-tax deduction in case of garnished income regardless of the reason.

Some examples of wage garnishment include default student loans, child support, medical debt, or fines. The types of incomes that can be garnished include hourly wages, salaries, commissions, bonuses, and retirement plan payments.

Wage garnishments are deducted from an employee’s paycheck based on their total income before any adjustments are made if pre-tax deductions are in place. Local, state, and federal taxes, additional wage garnishments, and other legally mandated deductions are exceptions to this rule.

Job-related Expense

If your employees are unionized, they will probably be required to pay dues in addition to any tax benefits the union provides.

Some other expenses that may be deducted from payroll include meals and travel. However, it may not be the same everywhere.

Health Insurance

Companies often provide employees with medical and dental coverage to improve retention. But the cost can be burdensome. To avoid the burden, an employer and the employees may pay insurance premiums on a pre-tax basis. It can be done through a section 125 plan.

Conclusion

It is crucial to understand the difference between pre and post-tax benefits for businesses to be successful. Post-tax benefits can lead to tax savings in the future. Staying updated on the post-tax, and pre-tax will save time and cost.