What Is Post-Tax Deduction?

Post-tax deductions, or after-tax deductions, are expenses or contributions subtracted from an employee’s income after taxes have been withheld. The tax implications can be substantial, so knowing the ins and outs is vital.

Examples of post-tax deductions

After-tax deductions include dues, donations, savings plans, and more. Here are just some examples:

• Voluntary retirement contributions. Examples of post-tax contributions in U.S. retirement accounts include Roth 401(k) and Roth 403(b) plans. Contributions are made with post-tax dollars and do not provide an immediate reduction in taxable income. However, qualified withdrawals from Roth accounts in retirement are tax-free.
• Certain insurance premiums. While many health insurance premiums are deducted pre-tax, some plans or contributions may be post-tax—especially if the employee opts for additional coverage.
• Union dues. Employees in a labor union may have union dues deducted from their paychecks. Union dues are usually post-tax deductions.
• Charitable donations. If an employee makes philanthropic contributions through workplace giving programs or payroll deductions, these contributions may be deducted from the employee’s after-tax income.
• Schedule A deductions. These deductions may include medical and dental expenses, state and local taxes, mortgage interest, job expenses, and gambling losses.

Pre-tax vs. post-tax deductions

The main differences between pre-tax and post-tax deductions are the timing of the deduction and their tax treatment.

For instance, pre-tax deductions are subtracted from an employee’s gross income before income taxes are calculated. This deduction reduces the employee’s taxable income.

Conversely, after-tax deductions are subtracted from an employee’s income after income taxes have been calculated and withheld. After-tax deductions do not reduce the employee’s taxable income.

What are the pros and cons of pre-tax deductions?

The primary advantage is the immediate reduction in taxable income—less taxable income means less paid in taxes. Nobody is going to complain about that.

A disadvantage of pre-tax deductions is a reduction in an employee’s take-home pay. While pre-tax deductions offer immediate tax benefits by lowering taxable income, they do result in less income each paycheck. Help your employees do the math on if pre-tax deductions are right for them and make sure they understand the tax and take-home ramifications.

Examples of pre-tax deductions

Pre-tax deductions range from retirement contributions to savings accounts. Here are some common examples of pre-tax deductions in the U.S.:

• 401(k) contributions
• Health insurance premiums
• Flexible Spending Accounts (FSAs)
• Health Savings Accounts (HSAs)
• Transportation benefits
• Group Life Insurance premiums
• Dental and Vision Insurance premiums
• Employee Stock Purchase Plans (ESPPs)
• Childcare Reimbursement Accounts

What are the pros and cons of post-tax deductions

An advantage lies in the potential for tax-free benefits or withdrawals in the future.

For example, with retirement savings in the U.S., both the contributions and the investment earnings may be withdrawn without incurring federal income tax if certain conditions are met.

A downside to post-tax deductions is that they don’t provide immediate tax benefits. When individuals contribute to accounts or make deductions with after-tax dollars, they do not experience a reduction in their taxable income in the current year even though they are getting less take-home money.

Do post-tax deductions appear on W-2s?

Post-tax deductions generally do not appear on W-2 forms.

W-2 forms report the employee’s taxable income and various pre-tax deductions (e.g., health insurance premiums or retirement plan contributions) that impact that income.

How do I calculate post-tax deductions?

The process varies depending on the type of deduction.

Employers must adhere to local regulations when calculating payroll taxes to ensure payroll compliance. Staying compliant is especially important when paying international employees, as local laws may vary.

Here are general steps to calculate after-tax deductions:

1. Identify the post-tax deduction. Determine the specific post-tax deduction. Examples include retirement contributions, after-tax health insurance premiums, or post-tax charitable contributions.
2. Determine the deduction amount. Determine the appropriate amount to deduct after withholding income taxes. This number is the after-tax amount to subtract from the net income.
3. Use net income. Start with the individual’s net income, which is the amount after withholding all applicable pre-taxes.
4. Subtract the deduction amount. Deduct the post-tax deduction amount from the net income to determine the adjusted income after the post-tax deduction. The formula is: Adjusted Income = Net Income - Post-Tax Deduction
5. Verify with a pay stub or statement. Ensure the employee’s pay stub lists the correct after-tax deduction and adjusted income. Employers typically provide detailed pay deduction information on these documents.
6. Communicate tax implications. While deductions are made with after-tax dollars, ensure your employees understand the potential tax implications on withdrawals or benefits associated with the deductions, especially if it involves savings or investment accounts.

Learn more with our Complete Guide to Payroll Tax: Definition, Costs, and Calculation

How can Pebl help?

Payroll is one of those things that takes way more time than it should and the ramifications of making mistakes are massive—and that’s just locally. When you’re dealing with a workforce spread across states, countries, or continents, it becomes even more complex.

Pebl is here to help. Our Global Payroll Service takes care of deductions (post- and pre-tax), bonuses, regulations, and everything else. We take the headache out of things and make sure your employees get every penny they are owed.

Deduct your stress and save time—contact us today.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

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