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

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 2020 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.

  • 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 $57,000 in 2020, 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.

business-man-cutting-taxes

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

COVID & the Future of Work: Insights from Paycor’s C-Suite

COVID & the Future of Work: Insights from Paycor’s C-Suite

The long-term future is impossible to predict, but what might all this mean, and how will work change, over the next year?In Paycor’s latest report, our Chief Executives and Group Leaders consider how SMBs will recruit, manage their workforce, optimize benefits and foster employee experience in the new normal of 2020.Download our guide to learn more.

Webinar: Remote Work 2020: Keeping Culture Strong Post COVID-19

Webinar: Remote Work 2020: Keeping Culture Strong Post COVID-19

Workplaces across the country will never be the same post COVID-19. Some employees will work from home permanently. Others may slowly return to the office but feel the impacts of social distancing and newly configured spaces. Amidst all the change and uncertainty, culture has never been more important. In this session, we will offer tips to help your culture thrive in this new normal.Speaker: Melanie Booher Melanie Booher is a proactive people connector, genuine leader, change agent, culture-champion and entrepreneurial business coach. Her passion lies in generating meaningful change in the areas of HR, People Operations, Talent Management, Leadership Development, Business Strategy and Culture-Shaping.

What are Supplemental Unemployment Benefits?

What are Supplemental Unemployment Benefits?

Reductions in force are unavoidable in economic downturns, but are traditional severance packages the way to go? They can be a big hit to your company’s cash flow and are subject to payroll taxes. The tax-friendlier option, Supplement Unemployment Benefits plans (SUBS), can spread out costs and deliver the same value for the employee, too. How Do Supplemental Unemployment Benefits Plans Work? SUBs got popular in the ‘50s as a way to help workers in industries with cyclical employment patterns get a more steady income. SUBs were often fought for in collective bargaining agreements. They’re growing in popularity again across industries. Under a SUB plan, in the event of a Reduction in Force (RIF) or temporary unemployment due to training,...

Take Our HR Benchmarking Quizzes

Take Our HR Benchmarking Quizzes

Paycor's research shows that 75% of high-functioning HR teams spend their time on mastering key pillars of HR excellence. Want to know how your team stacks up against others? Take our benchmarking quizzes to find out and get customized action plans based on your results. Recruiting Benchmark Quiz Benefits Benchmark Quiz Labor Costs Benchmark Quiz People Management Benchmark Quiz Compliance Benchmark Quiz