Pre-Tax Deduction

Learn about Pre-Tax Deduction and more with Workstream and improve your hiring vocabulary. Workstream helps companies hire better, faster - everyday.
Schedule a Demo Learn more about workstream

Understanding tax responsibilities, withholdings, benefits, and contributions are part and parcel of payroll processing. And while it is true that businesses hire payroll providers to do all the calculations, having a clear understanding of the different aspects of payroll is always an advantage. Today, we’ll be talking about pre-tax deductions. 

What is the meaning of a “pre-tax deduction”? 

A pre-tax deduction refers to an amount of money that is subtracted from the gross wages of an employee before withholding taxes. Note that it says “pre-tax” which strictly means before taxes. 

If you are an employer, it is best to be updated on regulations on pre-tax deductions set by the Internal Revenue Service (IRS). Here are some examples of pre-tax deductions: 

What is the significance of pre-tax deductions? 

There are many benefits that employees may be offered at work. These benefits may fall under pre-tax or post-tax deductions. If you are just beginning to know what deductions are, you might wonder why it matters if something is a pre-tax deduction or a post-tax deduction if both will be deducted from the gross pay anyway?

Whether a deduction is pre-tax or post-tax is significant because of its impact on taxes. Because pre-tax deductions are subtracted before taxes are taken from the gross wages, they reduce the reportable W-2 income. They lower the taxable income of the employee. As a result, the employee may have lesser Social Security, Medicare, and income taxes. Additionally, pre-tax deductions can also result in lower federal unemployment tax (FUTA) and state unemployment tax (SUTA) for employers. 

On the other hand, post-tax deductions are taken after taxes are withheld. They have no bearing on an employee’s taxable income. 

A note to employers, know that the rules on pre-tax deductions can vary. Be vigilant and check everything before running your payroll. 

What are other examples of pre-tax deductions? 


Let us see an example of how a pre-tax deduction can be calculated. 

Anna is an employee who receives $1,200 each pay period. She has a health savings account (HSA) with a deduction of $50 per payroll period.

Remember that a pre-tax deduction is subtracted before withholding taxes from gross wages. This means that the $50 is taken out first. 

$1,200 -$50 = $1,150

Anna’s taxable income becomes $1,150 per pay period after taking out the pre-tax deduction. Withholding taxes are based on $1,150 and not on the original gross wages of $1,200.

Try out Workstream to hire employees for
your business

A revolutionary hiring process for Hourly positions

A revolutionary hiring process for Hourly positions Hiring hourly staff in San Francisco can be a tough job. Workstream can help accelerate the process by letting you post on job boards like Indeed within seconds.

1-Click Job Posting

No more tedious copy and pasting. We integrate with all the top job boards. All applicants funnel into one intuitive dashboard.

Text-to-Apply Posters

Print out your unique QR code and text message number. Applicants scan/text to see all open positions and apply right away.

Automated & 2-Way SMS

Engage with applicants via text. Include links to screening questions, forms, and more. Use 2-way text to answer questions.

Endless Integrations

Connect Workstream to your calendar so applicants can schedule interviews. Streamline onboarding with background check & HR integrations.

Candidate Tracking & Scoring

View all your applicants and employees in one place. Make notes on their progress. Access their docs anytime from anywhere.

Customizable Templates

We provide templates for everything from job postings to offer letters. Send links to docs and tax forms via text message so new hires sign digital copies.

What other owners
think about hiring through Workstream

"Lucas was very helpful & quick to respond to my questions."

Granlibakken Tahoe

"It is an easy process to post positions and follow up."

Lasalle Bristol

"Everyone at Workstream is so helpful and willing to fix anything we have going wrong. Thanks!"

Envoy America