Help Employees Make the Most of Pre-Tax Deductions
Help Employees Make the Most of Pre-Tax Deductions

Help Employees Make the Most of Pre-Tax Deductions

Employers always need to be on the lookout for rules changes that affect the compensation and benefits you offer employees. This is especially true when it comes to limits for retirement savings and 401 (k) contributions. But don’t worry, we’ve got you covered. Here’s everything you need to know to help employees make the most of pre-tax deductions in 2021.

What are pre-tax deductions?

Pre-tax deductions are deductions applied to an individual's gross income, thereby decreasing the amount of wages upon which local, state and federal taxes will be owed. In addition to income tax liabilities, pre-tax deductions also decrease a worker's required contributions to Medicare and Social Security. One goal of making certain payments pre-tax is to provide incentive for people to plan ahead for various life events, such as retirement and medical expenses.

Common Pre-Tax Deductions

  • Retirement Savings
  • Contributions to any retirement savings such as a 401(k) plan, a Roth IRA, a 403(b) plan or a Government Thrift Savings Plan are deducted from an employee’s gross earnings prior to any taxation. Every dollar placed into one of these retirement savings plans reduces an individual’s taxable income by an equal amount. However, there are limits: the contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan for 2021 is $19,500. For employees over age 50 who participate in any of these plans, there is an additional allowance of $6,500 per year considered "catch-up" contributions. Finally, the limit on annual contributions to an IRA remains at $6,000, and $7,000 for those over 50.

  • 401(k) Contribution Limits
  • As an extra incentive, employers may offer to match employee retirement savings dollar for dollar to a certain amount. While the general contribution from an employer typically ranges from 3-6% of an employee’s pay, the IRS defines an overall contribution limit to an account each year. The maximum amount of total contributions from both employee and employer to a 401(k) is $58,000 in 2021, or 100% of an employee’s salary, whichever is less.

  • Employer high deductible health plans and health savings accounts
  • If your company offers the combination of a high deductible health plan along with a pre-tax health savings account, an employee may be able to save pre-tax dollars to pay for services and benefits that a high deductible health plan fails to cover. If your business doesn't offer this option to employees as a group, they can still arrange for personal health savings account although it will be funded with after-tax dollars. Encourage employees to speak to your company’s human resources department for more information.

  • Flexible Savings Accounts
  • Flexible Savings Accounts or FSAs, if your company decides to offer them, can vary as to availability and the maximum amount of annual contributions. Typically, they are used for IRS-approved medical care, procedures or supplies, or adult-care or childcare expenses. Eligible expenses should be made available in your company’s benefits manual or through your HR department.

  • Group Insurance Plans
  • Group health insurance plans—including medical care, dental care, vision benefits, life insurance, and short and long-term disability insurance—deduct an employee’s share of the premiums out of his pre-tax wages.

Other effects of payment or savings from pre-tax dollars

For every dollar contributed to a retirement account, flexible spending account or insurance plan, an employee’s taxable income is decreased accordingly. This decrease applies not only to federal income tax, but to Medicare and Social Security deductions as well. Finally, for the majority of states with state income tax, their assessment of an employee’s income begins with the employee’s Adjusted Gross Income (AGI) or the amount of wages after deduction of these pre-tax costs and contributions.

Rules and limits change annually

The rules, regulations, allowable maximums and limits to such programs can change annually. Processing an individual’s taxes correctly is very challenging without the latest information and the right experts who continue to monitor ever-changing regulations.

How Paycor Can Help

We’re proud to keep more than 30,000 organizations informed and compliant with federal and state laws and regulations. Since 1990, Paycor has maintained a core expertise in payroll and compliance. We established our compliance expertise in the Cincinnati tri-state area, one of the most complex tax jurisdictions in the country. If you’re looking for a trusted provider to help you manage the complexities of payroll tax, look no further than Paycor. Contact our team today to learn more.

Contact Paycor

More to Discover

Webinar: Virtual Demo: Employee Experience Solutions - 2/18 @1PM ET

Webinar: Virtual Demo: Employee Experience Solutions - 2/18 @1PM ET

Paycor’s human capital management software modernizes every aspect of people management, from the way you recruit, onboard and develop people, to the way you pay them, retain them and build a company culture. With a single source of truth for all employee data, you’ll never have to switch platforms, log-in to multiple systems, re-key information or open multiple spreadsheets. In this live virtual demo, our product experts will highlight Paycor’s Employee Experience Solutions, including HR, Learning Management and our mobile functionality. Discover how HR Leaders can build a great place to work where people show up, make a difference and win together. During the webinar, we’ll highlight how Paycor helps you: • Get out of the weeds and...

Webinar: Relationship Wellness Series: Navigating the Different Personalities at Work - 2/23 @2PM ET

Webinar: Relationship Wellness Series: Navigating the Different Personalities at Work - 2/23 @2PM ET

The differences in our ideas, backgrounds and personalities often strengthen the success of our teams. However, sometimes the differences can be a challenge. One simple way to enhance communication among the differences is to learn about each team member’s personality type. The purpose of this webinar is to help you easily identify personality types and better navigate successful relationships.In-depth personality type tools often require budget and lengthy training. In this webinar, our speakers will cover the following: - Learn a tool to help you self-assess your personality - Discuss the preferences of the different personality styles - Participate in exercises to help you better understand - Learn tactics to adapt to others’ styles...

Webinar: Relationship Wellness Series: A Case Study - Creating an Inclusive Workplace for Your Workforce - 2/11 @2PM ET

Webinar: Relationship Wellness Series: A Case Study - Creating an Inclusive Workplace for Your Workforce - 2/11 @2PM ET

What does #BLM mean to your organization? Responsible organizations are waking up to learn that it is more than a hashtag. Historically, systemic inequities brought to the surface by #BLM and other awareness groups have had a disparaging impact on minorities. Because the system of oppression is designed to protect itself after hundreds of years, we all have a lot to learn about how to make change. Attend this session and learn how one university IT Dept of 300 people changed their culture using assessments, planning, and gumption. They increased feelings of inclusiveness among their Black workforce, and their female workforce, and ultimately increased employee engagement and job satisfaction.At the end of this presentation, and through a...

Demotion Letter Template

Demotion Letter Template

There’s nothing better than seeing employees thrive, but setbacks and slips in performance do happen. One way to address performance problems is a demotion. Sometimes, it’s necessary to take a step back before you can take two steps forward. Download Demotion Letter Template When is a Demotion Necessary? In an ideal world, there wouldn’t be demotions. They are a sign something’s wrong: it could be that an employee has failed to respond to a performance improvement plan or they could just be disengaged. A demotion is the last stop before termination. If you believe the person has potential and is worth investing in, then a demotion might be the best way forward. Demotions are risky, though. You could end up with an employee who is even...