Payroll involves a lot of deductions. The salary you negotiated when you were hired or last promoted is probably a far different number from what you see at the bottom of your paycheck. The budget and lifestyle you planned for and dreamed about—fancy dinners, all-inclusive trips abroad, luxury cars, and stylish new shoes—might not be possible once we start deducting from your wages. And though you were probably much more reasonable when planning your budget than the list above, it’s still a good idea to understand what can go out of your paycheck pre-tax. Here’s a list.
5 Places Your Pre-Tax Money Can Go
1. Pre-tax deductions
A pre-tax deduction is money that’s withheld from your wages before taxes that are generally used to pay for your benefits. Because they’re taken out before your taxes are taken out, they reduce your income, thus reducing the amount of federal income taxes and FICA taxes you’ll owe. Many fringe benefits allow for pre-tax deductions.
2. Retirement plans
Some retirement accounts, like an IRA or some types of 401(k)s are eligible for pre-tax deductions and are generally exempt from all employment taxes.
3. Life insurance
Group-term like insurance is exempt from all federal income and employment taxes and can be deducted, but it’s only exempt from FICA up to $50,000 of coverage.
4. Health insurance
Most health benefits can be withheld before taxes, including health insurance, accident insurance, dental and vision insurance, health savings accounts (HSA’s), and flexible savings accounts (FSA’s)
5. Transportation programs
Some employers help pay for their employees’ daily transportation and parking fees, some of which might be able to be deducted before taxes. Sometimes there’s a numerical limit to how much can be deducted from wages, so once that number is maximized, it’s no longer exempt from taxes.
And even though these items aren’t taxed now, you might find that you owe taxes on some of these benefits now. If that’s the case, your employer might make additional deductions from your paycheck and deposit that money into an account to pay those taxes then. But those funds will be taxed when you eventually use them.
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