You may see post-tax vs. pre-tax for both payroll deductions and retirement contributions. Here’s what they mean.
Payroll deductions are money that your employer takes out of your paycheck to cover certain benefits. Depending on your employment agreement, they may be mandatory or voluntary deductions.
Pre-tax deductions are taken out before calculating your taxable income. In other words, you don’t pay taxes on pre-tax deductions.
Post-tax deductions are taken out after taxes. So you do pay taxes on post-tax deductions.
For example, you have a $3,000 paycheck with $500 each in pre-tax and post-tax deductions. You subtract the $500 in pre-tax deductions and pay taxes as if you received a $2,500 paycheck.
What payroll deductions are on a pre-tax basis?
The following payroll deductions are usually pre-tax:
- Health insurance
- 401(k) contributions (unless you choose a Roth option)
- HSA contributions
- Certain childcare expenses
- Certain supplemental insurance plans
- Certain disability insurance plans
- Certain commuter or parking benefits
Your employer will usually calculate what’s on a pre-tax versus post-tax basis for you. It should show on both your paystubs and your W-2 at the end of the year.
Because pre-tax payroll deductions are already taken out of your taxable income, you won’t take a separate tax deduction for them when you file your tax return.
Your tax filing software may ask you about pre-tax deductions for other reasons. For example, 401(k) contributions may qualify for the Saver’s Credit.
Wage garnishments are generally not deductible. Garnishments are for other money that you already owe.
In some cases, if the garnishment is for something you can take a deduction for, such as state taxes, you may be able to take the state tax deduction or whatever deduction you would have qualified for if you made the payment directly instead of through a garnishment.
Retirement Plan Contributions
Retirement plan contributions can also be pre-tax or post-tax.
Pre-tax contributions are made to traditional IRA or 401(k) accounts. Some smaller employers may offer a SEP IRA or SIMPLE IRA instead. You get a deduction when you contribute and pay income taxes when you withdraw the money in retirement.
Post-tax contributions are made to Roth IRA or 401(k) accounts. You don’t get a tax deduction when you contribute, but you get to make tax-free withdrawals when you retire.
Whether you make employee contributions to a 401(k) or cash contributions to an IRA doesn’t matter. The pre-tax or post-tax status goes by what type of account you’re contributing to.
Is pre-tax or post-tax better?
In some cases, you don’t get to choose whether your deductions are pre-tax or post-tax. Whether you get a tax break goes by the tax law for each deduction.
Some deductions, like traditional versus Roth retirement plan contributions, do give you a choice. The usual rule of thumb is that if you think your income will be lower in retirement, take a pre-tax deduction now and pay lower taxes later. If you think your income will be higher in retirement, choose the Roth option to pay lower taxes now.