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

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 is $18,500. For employees over age 50 who participate in any of these plans, there is an additional allowance of $6,000 per year considered "catch-up" contributions. Finally, the limit on annual contributions to an IRA remains at $5,500.

  • 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 $55,000 in 2018, 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 impossible without the latest information. To boost employees’ knowledge of available programs and make employee benefits easier to manage, contact Paycor to learn about our full suite of HCM solutions, including recruiting, onboarding, HR, timekeeping, payroll, reporting and benefits administration. Paycor’s applications can simplify your processes and allow your employees easy access to view their compensation history and pre-tax funding dollars.


Subscribe to Our Resource Center Digest

Enter your email below to receive a weekly recap of the latest articles from Paycor's Resource Center.

Check your inbox for an email confirming your subscription. Enjoy!

More to Discover

Case Study: Rochester University

Case Study: Rochester University

Michigan based Rochester University relied on their own payroll processing for nearly 60 years. But when their payroll administrator decided to retire, they turned to Paycor to help them save time and resources. “In the three years we’ve been a Paycor customer, I’ve never had a problem reaching my dedicated support team. I always get a call back and most of the time it’s on the same day. If I have an emergency, I know I can trust Paycor.” – Ginny May, Director of HR With Paycor, Rochester University has significantly transformed how they manage HR and process payroll with Paycor Time, Paycor’s Mobile App and ACA filing. By eliminating manual work, their staff has more time to focus on strategic initiatives like finding the right faculty...

3 Reasons to Invest in a Learning Culture: Recruit, Retain, Engage

3 Reasons to Invest in a Learning Culture: Recruit, Retain, Engage

Learning is a win/win for employers and employees. Learning-driven organizations tend to be more efficient, create more customer value and market leadership, and report higher customer satisfaction. Employees of all ages, especially Millennials, see re-skilling and upskilling as critically important, and often it’s the deciding factor in their decisions to take a new job or stay at their current company.In Paycor’s Guide, “3 Reasons to Invest in a Learning Culture,” you’ll learn how to invest in and build a learning culture. You’ll also learn the “why behind the what,” and see firsthand how your company’s learning impacts your ability to recruit, retain and engage talented people.Download Paycor’s Guide for actionable tips and insights...

Learning Management Case Study: Gerber Poultry

Learning Management Case Study: Gerber Poultry

With nearly 500 employees, Gerber Poultry was looking for a solution to drive efficiencies around training by automating the process. Specifically, they needed a tool to deliver personalized training courses to employees, track completions for compliance purposes and eliminate the manually-intensive work that was required for Gerber’s HR team.Read the case study below to learn how Paycor Learning Management has not only transformed Gerber Poultry’s learning program but helped to increase employee engagement.

4 Common Payroll Mistakes and How to Fix Them

4 Common Payroll Mistakes and How to Fix Them

Overtime Pay, Pay Equity, Workers’ Comp, Payroll Taxes Topics Covered Missclassifying Employees Pay Equity Workers' Comp Payroll Taxes Dump Your Payroll Provider Payroll Compliance: More Complex Than You Think From FLSA, EPA, Workers Comp and more, there are lots of federal laws to keep track of, and state and local taxes only add complexity. That’s why HR and business leaders need to have processes in place to consistently apply pay policies, accurately calculate overtime and streamline leave policies. If you don’t and your company is audited or sued, you won’t have the proper controls in place to quickly provide accurate records and audit trails. Here are four common Payroll mistakes you might be making: Misclassifying Freelancers and...