What Are Pre-Tax Deductions?
A pre-tax deduction is any money taken from an employee’s gross pay before taxes are withheld from the paykiểm tra. These deductions reduce the employee’s taxable income, meaning they will owe less income tax. They may also owe less FICA tax, including Social Security và Medicare. Pre-tax deductions might lower employer-paid taxes like the Federal Unemployment Tax (FUTA), FICA, & SUI.
Pre-Tax Deduction List
The federal government may change the rules regarding pre-tax deductions on an annual basis. Regulations & limits are also subject khổng lồ change. Be sure to lớn kiểm tra for updated information regarding pre-tax deductions before making changes to lớn payroll. Here’s a danh mục of items that currently qualify as pre-tax deductions:
Health Savings Accounts
Supplemental Insurance Coverage
Child Care Expenses
Medical Expenses and Flexible Spending Accounts
Are Pre-Tax Deductions Good?
Pre-tax deductions are beneficial khổng lồ most employees and employers. Using a pre-tax deduction plan allows employees to lớn get coverages and benefits lượt thích 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.
Because pre-tax deductions are considered so advantageous, most plans have a limit khổng lồ the amount of contributions that can be made in a year. This means employees will not be able lớn get limitless savings from their pre-tax deduction plan.
Some pre-tax deductions may also be subject khổng lồ Social Security & Medicare tax. Hence, the Social Security & Medicare taxes an employee pays may be based on a higher gross income than shown for computed income taxes. This can be a benefit to lớn the employee, increasing Social Security credits & benefits in the future.
Do Pre-Tax Deductions Reduce Taxable Income?
Yes, pre-tax deductions will almost always reduce taxable income for an employee. This occurs because the money is taken out of the employee’s gross pay before taxes are withheld. Pre-tax deductions may also reduce taxes for an employer who pays FUTA, FICA, and SUI.
Pre-tax deductions change from year khổng lồ year. They are adjusted for inflation and costs of living by the federal government. This may affect how much taxable income is reduced from one year lớn the next.
In contrast, post-tax deductions bởi not reduce an employee’s taxable income. An employee’s income will be taxed before the deduction is taken from the paykiểm tra. Post-tax deductions may include items such as union dues or other benefits that exceed the pre-tax deduction limits.
Pre-Tax Deduction Example
There are a variety of deductions and contributions that can be considered pre-tax deductions. Here is an example of how lớn go about calculating a pre-tax deduction:
An employee has a gross pay of $1,000 per pay period. They also have an HSA deduction of $50 per pay period. The pre-tax withholding needs khổng lồ be subtracted from the gross pay first, making the employee’s taxable income $950. At this point, you can withhold taxes from the employee’s pay. Taxes should not be withheld before subtracting the HSA amounts or conducting any other pre-tax deductions.
Other examples of pre-tax deductions include:
A traditional 401(k) can be considered a pre-tax deduction. Both the employee and employer may make contributions before the income is taxed.
Health benefit plans like an HSA or FSA are considered pre-tax deductions. Company-sponsored health insurance may also allow pre-tax deductions for employees who pay for such health plans.
Commuter benefits are a type of qualified fringe benefit that goes into lớn an employer-funded trương mục. This tài khoản is considered a pre-tax deduction. For example, an employer may put $100 a month into a commuter account for a bus pass or train tickets.