Many of you may have heard your employer’s payroll department or someone mention pre and post-tax benefits. You may have even seen this on your paycheck but do you really understand the difference between the two?
Let’s discuss the basics. Pre-tax deductions are withheld from your wages before they are taxed. Pretty simple, right? By reducing the taxable amount of your wages, you net more of your paycheck.
On the other hand, post-tax deductions are withheld after your wages are taxed. Post-tax deductions, therefore, have no positive effect on your taxable income.
Deductions that are set up as pre-tax
Health Insurance, Dental Insurance, Vision Insurance, Flexible Spending Accounts, Health Savings Accounts, Some Voluntary Benefits (Cancer, Accident, Hospital), Life Insurance (up to $50k in Arkansas)
Deductions that are set up as post-tax
Disability Insurance, Life Insurance, Critical Illness Coverage, Garnishments, Dues, Christmas and other employer specific funds
Drawbacks to pre-tax deductions? In some cases, an employee, who nets more of their paycheck because of pre-taxed deductions, could owe taxes on the withheld money in the future.
For example, if you were to pre-tax $50,000 of your life insurance, your beneficiary would have to pay taxes on the $50,000 death benefit. That being said, you may consider post-taxing the permanent life insurance deduction, if you want your beneficiary to receive the full amount of death benefit.