Benefits Corner

Pre-tax vs. Post-tax Deductions: What is the Difference?

Submitted by Emily Cole, Marketing Coordinator, Educational Benefits

With tax season upon us, most of us are thinking a little more about your income, taxes and health benefits (whether we want to or not). One of the most common questions that arise this time of year is about the difference in pre- and post-tax deductions and how they might impact your income tax.

So, here are the basics: Pre-tax deductions are withheld from your wages before they are taxed. By reducing the taxable amount of your wages, you net more of your paycheck.

Pretty simple, right?

Well, on the other hand, post-tax deductions are withheld after your wages are taxed. Post-tax deductions, therefore, have no positive effect on your taxable income.

Deductions that are set up as pre-tax:

Health Insurance, Dental Insurance, Vision Insurance, Flexible Spending Accounts, Health Savings Accounts, Some Voluntary Benefits (Cancer, Accident).

Deductions that are set up as post-tax:

Disability Insurance, Voluntary Term Life Insurance, Critical Illness Coverage, Garnishments, Dues, Christmas and other employer-specific funds.

In general, benefits that provide a lump sum payment are post-tax so that the benefit itself is not taxed.

So, why is this and what are potential drawbacks to pre-tax deductions? In some cases, an employee who nets more of their paycheck because of pre-tax deductions could owe taxes on the withheld money in the future. As an example, if you were to pre-tax $50,000 of your life insurance, your beneficiary would have to pay taxes on the $50,000 death benefit. That’s why post-taxing the voluntary term life insurance deduction makes sense if you want your beneficiary to receive the full amount of death benefit.

If you have questions about your deduction options, please reach out to your payroll department or Benefit Consultant.