Pre-tax deductions

What are pre-tax deductions?

Pre-tax deductions are amounts taken out of an employee’s gross wages before income taxes are applied. These deductions reduce the employee’s taxable income, potentially lowering the amount of federal, state, and sometimes payroll taxes owed.

Pre-tax deductions are commonly used for benefits like health insurance, retirement contributions, and commuter programs, offering both employees and employers tax savings.

How do pre-tax deductions work?

When payroll is processed, certain eligible deductions are subtracted from an employee’s gross pay before tax calculations occur. This results in:

• A lower taxable income for the employee.
  
  
• Reduced employer payroll tax liabilities (in some cases).
  
  
• Increased take-home pay, depending on the deduction and benefit structure.
  
  

Examples of common pre-tax deductions include:

• Health insurance premiums
  
  
• 401(k) or other retirement plan contributions
  
  
• Health Savings Account (HSA) or Flexible Spending Account (FSA) contributions
  
  
• Commuter or transportation benefits
  
  

Not all benefits qualify for pre-tax treatment, and eligibility may vary by jurisdiction.

Why do companies offer pre-tax deductions?

Pre-tax deductions benefit both employers and employees by:

• Helping employees save on taxes and increase their net income.
  
  
• Encouraging participation in employer-sponsored benefit programs.
  
  
• Reducing the employer’s payroll tax burden.
  
  
• Supporting financial wellbeing and retention through attractive benefit offerings.
  
  

Examples of pre-tax deductions

• An employee contributes 5% of their pay to a 401(k) retirement plan before taxes are applied.
  
  
• A worker’s monthly health insurance premium is deducted pre-tax, lowering their taxable income.
  
  
• A company offers a commuter benefit program where train fare is deducted from paychecks pre-tax.
  
  

Pre-tax vs. post-tax deductions

Understanding the difference between pre-tax and post-tax deductions is important for accurate payroll and tax planning.

• Pre-tax deductions are subtracted from gross pay before taxes are calculated, reducing taxable income.
  
  
• Post-tax deductions occur after taxes are withheld and do not impact taxable income (e.g., Roth 401(k) contributions, union dues, wage garnishments).
  
  

Things to consider with pre-tax deductions

Employers and employees should keep in mind:

• Local laws that govern which benefits can be offered pre-tax.
  
  
• Limits or caps on contributions.
  
  
• How changes to deductions affect taxable income and benefit eligibility.
  
  
• Proper documentation and payroll system configuration to ensure compliance.
  
  

How Remote can help

Pre-tax deductions can become complex when managing benefits and payroll across multiple countries. Remote helps you stay compliant with local tax laws and configure deductions correctly in payroll‌ — ‌no matter where your employees are based.

Remote takes care of global benefits administration so your team gets the most from their compensation. Discover how Remote can help you run global payroll and benefits like a local today.