Questions About Pre-Tax Deductions
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Pre-tax deductions may be a term you have heard your payroll administrator use when discussing your paycheck. These deductions are funds taken from your gross income that reduce your taxable wages. 401k deductions and some health care contributions are examples of pre-tax deductions. The qualifications for pre-tax deductions and its benefits are a source of many of the questions related to them. - Your employer must set up a "Section 125" plan with the IRS to have your health premiums count as pre-tax deductions. The same applies to health savings account contributions. Employers have the option of setting up a "Section 125 Premium Only Plan" which allows employers to pre-tax a number of insurance plans ranging from HMO plans to PPO plans. With health service accounts, employees can change the amount of money they contribute to the plan, thus increasing and decreasing their tax base as they choose.
- If you operate a company that permits pre-tax deductions through payroll withholding, you may benefit in a couple of ways. First, since pre-tax dollars lower the amount of FICA (Federal Insurance Contribution Act) and Medicare contributions that an employee must pay, your matching contribution is also lower. Additionally, your employee pre-tax deductions can be tax-deferred, which allows you to postpone payments of your taxes until a later date.
- Some employers, such as Prairie View A&M University, permit employees to purchases parking permits or other commuting costs---such as bus passes---that qualify as a pre-tax deduction. The school defrays the costs of permits through payroll deduction. Many employers have a number of plans---including health savings accounts an health retirement accounts----that are pre-tax deductible. Deductions are permitted if you or your employer have set up a "Section 125" plan and premiums are withheld from your paycheck.
