Glossary of Human Resources Management and Employee Benefit Terms
An after-tax deduction, also known as a post-tax deduction, is an amount of money that is subtracted from a taxpayer’s earnings after taxes (federal, state, and local income, Social Security, and Medicare) are withheld. After-tax deductions can vary by state but may include:
Roth 401(k) contributions
Employer-sponsored pension plans
529 college savings plans
Disability and certain life insurance policies
Here’s a simplified example for calculating an after-tax deduction:
Caroline’s gross wages are 1,000 dollars. Her FICA taxes are 7.65 percent, her additional taxes total 75 dollars, and her Roth 401(k) after-tax deduction is 4 percent.
Here’s Caroline’s take-home pay once FICA, which includes Social Security and Medicare taxes, and other incomes taxes have been withheld:
Multiply the gross pay by the FICA percentage: $1,000.00 X 0.0765 = $76.50
Multiply the gross pay by the deduction percentage: $1,000.00 X 0.04 = $40.00
Subtract the FICA amount from the gross pay: $1.000.00 - $76.50 = $923.50
Subtract the additional taxes from the new total: $923.50 - $75.00 = $848.50
We’ll pause here to point out that $848.50 would be what Caroline gets paid, if not for her Roth 401(k) after-tax deduction, which hasn’t come out yet. That comes next:
Subtract the deduction amount from the new total: $848.50 - $40.00 = $808.50
Caroline’s take-home pay equals $808.50.
The main difference between pre-tax deductions and after-tax deductions is when the deductions are withheld from a paycheck. Before-tax deductions are subtracted from the employee’s gross pay before taxes are withheld. After-tax deductions are subtracted from the employee’s net pay after taxes are withheld.
The primary advantage of pre-tax deductions is that they reduce the reportable W-2 income, effectively lowering the taxes due. The primary disadvantages are that the take-home pay is lower and future benefit payments will be taxed upon withdrawal. Examples of pre-tax deductions include traditional 401(k)s, HSAs, FSAs, and health insurance.
The primary advantage of after-tax deductions is that the take-home pay is higher, while the primary disadvantage is that the tax liability is also higher.
Here are some examples of after-tax deductions:
Some healthcare benefits
Schedule A deductions, which include:
Medical and dental expenses
Taxes you paid
Interest you paid
Gifts to charity
Casualty and theft losses
Most of the time, only pre-tax deductions are shown on a W-2, but there are some circumstances when after-tax deductions are listed there as well. For example, voluntary after-tax contributions to a non-Roth pension plan can be listed in Box 14.
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