What are pre-tax deductions?
Pre-tax deductions refer to the money deducted from an employee’s gross pay on a pre-tax basis, or before taxes.
There are many pre-tax benefits. The benefits of pre-tax deductions include reduced taxable income, meaning the employee will owe less income tax, resulting in tax savings, and reduced employer-paid taxes such as FUTA, FICA, and SUI.
The federal government reviews pre-tax deduction applicable rules, limits, and regulations over a period of time, which like other federal taxes, are reviewed annually.
Pre-tax deductions can be taken for medical care, life insurance, traditional 401(k) contributions, company-sponsored insurance, and commuter benefits (such as public transportation as an example). These benefits reduce the employee’s taxable income and may increase future Social Security credits and benefits. Pre-tax deductions are subject to limits, and post-tax deductions, such as union dues, do not reduce taxable income.