What Is Post-Tax Deduction?

Post-tax deductions, or after-tax deductions, are expenses or contributions subtracted from an employee's income after taxes have been withheld.

Unlike pre-tax deductions, which are taken out before calculating income tax, post-tax deductions are applied after taxes are taken out of an employee's gross pay.

Examples of post-tax deductions

After-tax deductions range from dues and donations to savings plans. Here are some instances of post-tax deductions:

• Voluntary retirement contributions. Examples of post-tax contributions in U.S. retirement accounts include Roth 401(k) and Roth 403(b) plans. Contributions are made with post-tax dollars and do not provide an immediate reduction in taxable income. However, qualified withdrawals from Roth accounts in retirement are tax-free.
• Some insurance premiums. While many health insurance premiums are deducted pre-tax, some plans or contributions may be post-tax—especially if the employee opts for additional coverage.
• Union dues. Employees in a labor union may have union dues deducted from their paychecks. Union dues are usually post-tax deductions.
• Charitable donations. If an employee makes philanthropic contributions through workplace giving programs or payroll deductions, these contributions may be deducted from the employee's after-tax income.
• Schedule A deductions. These deductions may include medical and dental expenses, state and local taxes, mortgage interest, job expenses, and gambling losses.

Pre-tax vs. post-tax deductions

The main differences between pre-tax and post-tax deductions are the timing of the deduction and their tax treatment.

For instance, pre-tax deductions are subtracted from an employee's gross income before income taxes are calculated. This deduction reduces the employee's taxable income.

Conversely, after-tax deductions are subtracted from an employee's income after income taxes have been calculated and withheld. After-tax deductions do not reduce the employee's taxable income.

Advantages and disadvantages of pre-tax deductions

The primary advantage of pre-tax deductions is the immediate reduction in taxable income.

When employees contribute to pre-tax deduction programs, such as employer-sponsored retirement plans, health savings accounts, or specific insurance premiums, the contributed amount is subtracted from their gross income before income taxes are calculated.

A disadvantage of before-tax deductions is the potential reduction in an employee's take-home pay. While pre-tax deductions offer immediate tax benefits by lowering taxable income, they also result in less income each paycheck.

Examples of pre-tax deductions

Pre-tax deductions range from retirement contributions to savings accounts. Here are some common examples of pre-tax deductions in the U.S.:

• 401(k) contributions
• Health insurance premiums
• Flexible Spending Accounts (FSAs)
• Health Savings Accounts (HSAs)
• Transportation benefits
• Group Life Insurance premiums
• Dental and Vision Insurance premiums
• Employee Stock Purchase Plans (ESPPs)
• Childcare Reimbursement Accounts

Advantages and disadvantages of post-tax deductions

An advantage of post-tax deductions lies in the potential for tax-free benefits or withdrawals in the future.

For example, regarding retirement savings in the U.S., both the contributions and the investment earnings may be withdrawn without incurring federal income tax if certain conditions are met.

After-tax deductions are also a disadvantage because they don't provide immediate tax benefits. When individuals contribute to accounts or make deductions with after-tax dollars, they do not experience a reduction in their taxable income in the current year.

Do post-tax deductions appear on W-2s?

In short, no. Post-tax deductions generally do not appear on W-2 forms.

W-2 forms report the employee's taxable income and various pre-tax deductions (e.g., health insurance premiums or retirement plan contributions) that impact that income.

How to calculate post-tax deductions

Calculating post-tax deductions involves determining the amount of money to subtract from an individual's income after withholding the appropriate taxes. The process varies depending on the type of deduction.

Employers must adhere to local regulations when calculating payroll taxes to ensure payroll compliance. Staying compliant is especially important when paying international employees, as local laws may vary.
  
Here are general steps to calculate after-tax deductions:

1. Identify the post-tax deduction. Determine the specific post-tax deduction. Examples include retirement contributions, after-tax health insurance premiums, or post-tax charitable contributions.
2. Determine the deduction amount. Determine the appropriate amount to deduct after withholding income taxes. This number is the after-tax amount to subtract from the net income.
3. Use net income. Start with the individual's net income, which is the amount after withholding all applicable pre-taxes.
4. Subtract the deduction amount. Deduct the post-tax deduction amount from the net income to determine the adjusted income after the post-tax deduction. The formula is: Adjusted Income = Net Income - Post-Tax Deduction
5. Verify with a pay stub or statement. Ensure the employee's pay stub lists the correct after-tax deduction and adjusted income. Employers typically provide detailed pay deduction information on these documents.
6. Communicate tax implications. While deductions are made with after-tax dollars, ensure your employees understand the potential tax implications on withdrawals or benefits associated with the deductions, especially if it involves savings or investment accounts.

Read also: Complete Guide to Payroll Tax: Definition, Costs, and Calculation

To avoid the complications of calculating payroll taxes and administering payroll for a distributed workforce, many employers choose to outsource global payroll to a reliable partner. This strategic move helps them sidestep potential pitfalls such as inaccuracies in payroll tax calculations and noncompliance with diverse payroll and tax regulations worldwide.

Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.