What are post-tax deductions? Examples

A post-tax deduction is an amount withheld from an employee's paycheck after deducting all applicable taxes. These deductions do not reduce the employee's taxable income, making them different from pre-tax deductions, which are subtracted from gross income before tax computations.

Examples of post-tax deductions include Roth 401(k) contributions, union dues, and some types of insurance premiums (more on this below). Unlike their pre-tax counterparts, these funds can typically be accessed without incurring additional tax liabilities, provided the withdrawal meets the IRS criteria for a qualified distribution, such as being made after age 59½ and following a five-year participation period.

HR professionals must accurately manage and communicate the implications of post-tax deductions, as they directly impact net income, employee satisfaction, and financial planning. Proper management is a cornerstone of responsible payroll administration, so a solid understanding is necessary to ensure regulatory compliance and foster transparent employer-employee interactions.

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Post-tax deduction examples

Post-tax deductions are amounts taken from an employee's paycheck after taxes are calculated and withheld. Common examples include Roth 401(k) contributions, union dues, life insurance premiums, and wage garnishments.

• Roth 401(k) contributions: One of the most common examples of post-tax deductions is Roth 401(k) contributions. While these contributions don't lower taxable income in the year they're made—unlike a traditional 401(k)—they allow for tax-free growth and withdrawal at retirement.

• Insurance premiums: Depending on the specific policy, life, disability, and certain health insurance premiums may be deducted after taxes. However, this isn't always the case, as some insurance premiums can be pre-tax based on the plan's structure and tax laws.

• Union dues: Another typical post-tax deduction, where employees who belong to a union have their dues deducted after tax calculations.

• Others: Charitable donations through payroll, personal loan repayments, and garnishments—like child support or tax liens—are other instances of post-tax deductions.

Each type of deduction has tax implications and potential benefits (and drawbacks); for instance, with a Roth 401(k), a nonqualified distribution could be a drawback, as the earnings portion of the withdrawal would be included in the employee's gross income.

Pre-tax vs. post-tax deductions

The key difference between pre-tax and post-tax deductions lies in when they're taken from an employee's pay:

• Pre-tax deductions: Subtracted before tax calculations, reducing taxable income and providing immediate tax savings. Examples include traditional 401(k) contributions and health insurance premiums.

• Post-tax deductions: Taken after taxes are calculated, so they don't reduce current taxable income but often allow tax-free access later. Examples include Roth 401(k) contributions and certain insurance premiums.

Knowledge and proper administration of these deductions help facilitate regulatory compliance, optimize employees' net income, and aid in comprehensive financial planning.

How post-tax deductions are calculated

Understanding how post-tax deductions are calculated helps clarify their impact on an employee's final take-home pay. Unlike pre-tax deductions that come out first, post-tax deductions are taken from an employee's net pay after all required taxes have been withheld.

Here's a simple breakdown of the payroll sequence:

1. Gross Pay: This is the employee's total earnings before any deductions.

2. Pre-Tax Deductions: Amounts for things like a traditional 401(k) or certain health benefits are subtracted. This lowers the employee's taxable income.

3. Taxes: Federal, state, and local income taxes, plus FICA taxes (Social Security and Medicare), are calculated based on the remaining taxable income.

4. Post-Tax Deductions: After all taxes are withheld, deductions for items like Roth 401(k) contributions or union dues are subtracted.

5. Net Pay: This is the final amount the employee receives, also known as take-home pay.

Here's how it works in practice: Sarah's pay after taxes is $2,000. She contributes $100 to her Roth 401(k) as a post-tax deduction, leaving her with $1,900 in take-home pay.

Do post-tax deductions show on a W-2?

Yes, certain post-tax deductions appear on Form W-2, but it depends on the nature of the deduction.

For instance, Roth 401(k) contributions, a common type of post-tax deduction, are reported in Box 12 of the W-2. This part of the form is designated by the code AA, and it allows the Internal Revenue Service (IRS) to track the amount contributed to a Roth 401(k) and ensure the individual doesn't exceed the maximum annual contribution; for 2024, the limit is $23,000, with an additional $7,500 catch-up contribution for those age 50 and over.

However, not all post-tax deductions appear on the W-2:

• Union dues and life insurance premiums: These appear on pay stubs only, not on W-2 forms, which can cause confusion.

• Union dues exceptions: Some professions can deduct these as business expenses using Form 2106.

• Life insurance premiums: Considered personal expenses since they're not government-required.

To avoid confusion and ensure employee understanding, HR professionals should be prepared to clarify these distinctions to ensure accurate tax reporting and make sure that employees know the details of their total compensation package.

Managing deductions across global teams

Think payroll deductions are complicated with a local team? Try managing them across multiple countries. Each country has its own rules for what counts as pre-tax versus post-tax, plus different requirements for pensions and social security contributions.

Keeping track of these local nuances is critical for compliance but can quickly become overwhelming for People Ops and Finance teams. A global employment platform simplifies this by embedding local expertise directly into the payroll process. This ensures every deduction is handled correctly, no matter where your employees live, so you can focus on building your team without getting lost in compliance details. Ready to simplify your global operations? Start hiring globally with a partner who makes it easy.

FAQs

Is it better to contribute pre-tax or post-tax to retirement accounts?

It depends on your current versus expected future tax bracket. Pre-tax contributions save money now but are taxed in retirement, while post-tax contributions offer no immediate savings but allow tax-free retirement withdrawals. For both account types, however, required distributions must begin by age 72, with some exceptions for those still employed.

Can employees opt out of post-tax deductions?

Employees can opt out of voluntary deductions like Roth 401(k) contributions and charitable donations, but not legally mandated ones like court-ordered wage garnishments.

How do post-tax deductions affect take-home pay?

Post-tax deductions reduce take-home pay dollar-for-dollar since they're taken after taxes are calculated. A $50 post-tax deduction means exactly $50 less in your final paycheck.