A pre-tax deduction is a certain amount of money subtracted from an employee’s gross salary before withholding government taxes. The main reason for this deduction is to decrease the taxable income of an employee. Besides income tax reduction, it also plays a vital role in minimizing Federal Unemployment Tax (FUTA), Social Security, Medicare, and FICA tax.
Often, the federal government makes some changes in the pre-tax deduction rules every year. As a result, there has been an incremental change in regulations of pre-tax deductions.
So, here’s an updated list of all the qualified types of pre-tax deductions:
One of the biggest advantages of the pre-tax deduction is that it’s equally beneficial to both employers and employees. From the employee's perspective, pre-tax deduction covers most benefits and insurance before the gross salary is calculated for income tax purposes. As a result, the taxable income of an employee becomes reduced. In this way, employees get to save a large amount of money on taxes. With a private plan, they can pay fairly less money for health insurance and other coverages as well.
Pre-tax deductions play one of the most important roles in reducing the taxable income of an employee. It’s because the deduction happens before withholding taxes, resulting in the reduction of the income tax as well.
It should be noted that the rate of pre-tax deduction changes from time to time. They are often adjusted according to the inflation rate and living costs in a certain region.
On the contrary, the post-tax deduction can’t alter or reduce the taxable income of an employee. On a post-tax deduction, the deduction will take place after the gross salary is being taxed, and will not affect the taxable income. But it can also have different sorts of benefits that pre-tax deduction doesn’t offer.