Post-tax deduction affects everyone in a business — from those paying wages to the employees receiving funds. So, it’s important to be familiar with the terminology and how it manifests in payroll taxes.
Also known as an after-tax deduction, post-tax deduction is the amount subtracted from a taxpayer’s earnings and withheld for various reasons, including Roth 401(k) contributions, life insurance, union dues, and disability insurance.
What is an after-tax deduction?
After-tax deduction refers to the amount of money deducted from an employee’s earnings after tax withholding. These required taxes include federal income tax, state tax, social security, and Medicare tax. The amount will vary depending on the taxable income of each earning bracket.
What are examples of post-tax deductions?
While the exact post-tax deductions may vary from one state (and country) to another, the following are a starting point.
Wage garnishments (non-optional post-tax deductions)
- Hourly wages
- Salaries
- Commission for sales
- Bonus payments
- Pensions and retirement plan payments
Garnishments can be withheld from an employee’s paycheck if the employee has unpaid debts such as child support, medical bills, and student loans.
Voluntary deductions (optional after-tax deductions) and employee benefits
- Health insurance
- Group-term life insurance
- Retirement contributions
- Job-related expenses such as uniforms, commuter benefits, and similar tax benefits
It’s required that voluntary deductions are disclosed to employees. A business must get the employee’s written consent before withholding insurance premiums.
Note that some 401(k) contributions to a retirement account may be subject to FICA taxes, while IRA contributions are withheld on a post-tax basis.
How to calculate post-tax deductions
Calculating post-tax deductions can be a complicated and time-consuming process, especially when managing a global team.
Consider the following basic steps as a guideline:
- Multiply the gross income by the FICA tax rate
- Multiply the gross pay by the deduction percentage (calculated beforehand)
- Minus the FICA value from the gross pay value
- Minus the additional taxes from the new total
- Minus the deduction amount from the above total to determine the take-home pay
The final employee’s paycheck will differ from one employee to another, depending on deductions, local taxes, and more. Using a global payroll platform streamlines international operations and eliminates the admin associated with local compliance, taxes, and benefits.
What is the difference between pre-tax and after-tax deductions?
There are a few nuanced differences between pre-tax and post-tax deductions, the most notable being when the deductions are withheld from an employee’s paycheck.
As mentioned, post-tax deductions are subtracted after tax dollars have been calculated and withheld from an employee's net pay.
In contrast, pre-tax deductions, also known as before-tax deductions, are subtracted from an employee’s gross pay before taxes are withheld.
Examples of pre-tax contributions include:
- Traditional 401(k)s
- Health Savings Account (HSA)
- Flexible Spending Account (FSA)
- Health insurance
Some deductions are recorded as either pre-tax or post-tax deductions. For example, long-term disability (LTD) deduction can be taxed either way, with a different impact on employees and their available healthcare. Medical expenses can be considered as the employee’s total cost to the company on a pre-tax basis.
The combined value of pre-tax and post-tax deductions contributes to the difference between an employee’s gross pay and net pay.
Ultimately, after-tax deductions increase the amount of money employees receive in their bank accounts. On the flip side, the tax liability is also higher.
FAQs about post-tax deductions
Do after-tax deductions reflect on W-2s?
In most instances, a W-2 only documents pre-tax deductions. However, voluntary after-tax contributions to non-Roth pension plans may reflect in Box 14. Instead, the employer’s Annual Federal Unemployment (FUTA) Tax Return, the employer’s quarterly federal tax return, and the employer’s annual federal tax return reflect payroll deductions.
What are statutory deductions?
Statutory deductions refer to compulsory payments stipulated by government agencies for public programs and services. Federal Insurance Contributions (FICA) and federal income tax fall into this bracket. These payments will differ depending on the status of the employee — namely full-time or independent contractor. IRS documentation offers more information on these details.
How do post-tax deductions work for remote companies?
Tax deductions have become more widely available for remote workers; sometimes referred to as remote work allowances. Global and remote companies must comply with local taxes and consider the legal administration involved.
Global payroll made easy with Deel
Are you running a global team? Feeling overwhelmed with compliance and tax details? As a streamlined global HR platform, Deel offers everything you need to hire, pay, and manage contractors and employees in a compliant and effective way. Whether you’re a small business composed of remote workers or a global enterprise - we’ve got you covered.
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