Tax deductions

Understanding before and after tax deductions from your salary

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Everyone loves payday, but seeing your gross income, i.e. what you earned, lined up next to your net income, i.e. what you need to keep, can make it a little sweet and sour.

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Your employer withholds money from each paycheck to give to the IRS on your behalf to cover your income taxes and Medicare and Social Security payments — but taxes aren’t the only thing that can reduce your check before it even reaches your bank account.

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Your employer can — and sometimes must — withhold money from your paycheck for a variety of reasons, and whether this happens before or after the taxman gets their cut can have a big impact on your financial life.

Here’s what you need to know.

Understanding before-tax and after-tax deductions

Pre-tax deductions occur when your employer takes money out of your check before the IRS gets its claws on its share of your income. While it would of course be nice to be able to keep everything, pre-tax deductions can actually benefit you by reducing your taxable income. When your taxable income decreases, the amount you owe the IRS also decreases.

In some cases, pre-tax deductions can even completely exempt you from local, state, and federal taxes. In other cases, pre-tax deductions only delay your tax obligations — 401(k) contributions, for example, are taxed when you start making withdrawals in later retirement.

Pre-tax deductions also reduce your federal and state unemployment taxes.

After-tax deductions, on the other hand, are payroll deductions taken from an employee’s check after taxes have already been withheld. After-tax deductions do not reduce your tax payable.

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Many of these deductions are voluntary, but in a few rare cases, employers are required to accurately withhold a portion of their workers’ checks.

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Common pre-tax deductions

Employers withhold money from their employees’ paychecks for all sorts of reasons, primarily to withdraw their contributions to the benefit programs in which they are enrolled. Some of the most common pre-tax contributions include:

  • Health insurance contributions
  • 401(k) plans and other retirement plans
  • Disability insurance payments
  • Employee transportation programs
  • Child care plans
  • Dental plans and vision
  • Flexible Spending Accounts
  • Health savings accounts
  • Life insurance plans
  • Medical fees
  • parking permit
  • Tax-deferred investments

Common after-tax deductions

Some deductions are made after the employee’s taxes have already been withheld. Among the most common are:

  • Roth IRA and Roth 401(k) retirement contributions
  • Disability insurance
  • Life insurance
  • Union dues
  • Charitable donations

Some deductions on the list, such as life insurance and disability insurance, may also be taken out as pre-tax deductions depending on the structure of the employer’s benefit program. Other deductions, such as union dues and Roth pension contributions, must be taken after taxes have been paid.

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Wage garnishments are in a class of their own

All after-tax deductions in the last section are voluntary deductions. One deduction, however, must be withheld on an after-tax basis and is never voluntary: wage garnishments. Wage garnishments occur when a court orders an employer to withhold part of an employee’s paycheck and give it to the person or creditor to whom the employee owes an unpaid debt.

Some of the most common wage garnishments include:

  • Tax levies
  • Student loans
  • Alimony and alimony
  • Credit card debt, medical debt, personal loan debt, and debts to other private creditors

You can’t avoid wage garnishments — especially when you owe the IRS

In most cases, federal law allows creditors to garnish up to 25% of a worker’s wages. The IRS, however, plays by a completely different set of rules than alimony and child support creditors and recipients.

First, the IRS doesn’t need a court order — it can simply order an employer to begin garnishing an employee’s wages. Second, unlike the rest, the IRS is not limited to a percentage of your check – the agency is only limited by the amount of money it is required to leave with taxpayers after garnishing their wages. Finally, federal tax liens take precedence over all other creditors in almost all situations – if there’s a line, the IRS usually fights its way forward.

The Consumer Credit Protection Act prohibits employers from firing workers for a single wage garnishment, even if there are multiple levies or proceedings brought to collect it. A second garnishment, however, is a dismissable offense.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was previously one of the youngest nationally distributed columnists for the nation’s largest newspaper syndicate, the Gannett News Service. He worked as a business editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as an editor for TheStreet.com, a financial publication at the heart of New York’s Wall Street investment community. .