Every year, working Americans receive their paychecks minus the estimated taxes they will owe. These taxes include federal income tax and Federal Insurance Contributions Act (FICA) for Social Security and Medicare. Additional taxes may be levied by state and local government. Generally, employees have the option of deducting money pre-tax and post-tax. A pre-tax deduction is the money taken out of your salary before taxes; a post-tax deduction is taken out after all taxes have been deducted from your salary.
Calculate your total annual income or gross pay. As implied by the name, pre-tax deductions are deducted from your income before taxes. These deductions generally are made in connection with participation in company benefit programs. Some examples of these benefits include health insurance premiums, health savings account contributions and commuter costs.
Determine the total cost of benefits each pay period. Consider all of your health benefits including vision and dental care plans. Once you've determined the total amount of pre-tax deductions, you will know the exact amount of money that will be deducted from your paycheck. Multiply the deduction percentage by your total income to calculate the amount of money that will be deducted from your salary on a yearly basis.
Compute the amount of income left after you've subtracted pre-tax deductions (these generally do not include retirement or savings plans). When you set up a savings or retirement plan, you will be notified of the percentage of your income that will be allotted to this program. Based on your annual salary and tax bracket, you will be able to calculate the per cent of your gross pay that will be deducted for taxes. Use these figures to determine your salary level prior to post-tax deductions.
Review your post-tax deduction options. These are automatic payments from your post-tax income used to pay for such things as life insurance and employer stock purchases. Once you have determined the percentage of your income that is required for your deductions, you can multiply it by your post-tax income to calculate the amount of the deductions that will be taken out after taxes.
Enter your information into an online tax calculator (see Resources) to confirm the predicted values and clarify any misconceptions about how much of your salary is being allocated towards pre-tax and post-tax deductions.
Take advantage of opportunities to lower your tax liability by increasing your number of pre-tax deductions.
You should carefully review your pre-tax and post-tax options because some company benefits may have certain constraints or limitations.
Tips and warnings
- Take advantage of opportunities to lower your tax liability by increasing your number of pre-tax deductions.
- You should carefully review your pre-tax and post-tax options because some company benefits may have certain constraints or limitations.