An after-tax deduction is an amount taken from an individual’s remaining income after pre-tax deductions and all the other payroll taxes are deducted. Let’s expand this definition a little.
After applicable taxes have been deducted and they have made their pre-tax deductions from their payroll, a certain amount remains known as the post-tax income. After-tax deductions, which are voluntary deductions done for the benefits employees get, are made from this post-tax income.
Sources of After-Tax Deductions
There are a lot of sources for making after-tax deductions. Below is a list of some of the common items from which after-tax deductions happen.
Roth 401(K) and other small business retirement plan options;
Some Schedule A (Form 1040) deductions, such as medical and dental expenses, gifts to charity, paid taxes, paid interests, and losses from thefts, and casualties.
The income that is finally remaining after deducting these from the gross income after the deduction of pre-tax and payroll taxes is the after-tax income of an individual.
Pre-Tax Vs After-Tax Deductions
So, what are the differences between pre-tax deductions and after-tax deductions? The main differences lie between the time when each deduction is made from the net income.
Pre-tax or before-tax deductions are made from a person’s net salary amount before payroll taxes are made. And after all the tax deductions are made from the payroll, the individual is left with a gross income, from which after-tax deductions are made.
Pre-tax deductions have the advantage of reducing the reportable W-2 income, which is the income earned and taxes withheld in the previous year, which is to be reported in an individual’s income tax returns. But a disadvantage is the person will be taking home a lesser pay, and future benefits will be taxed.
With the post- or after-tax deductions, the main disadvantage is that it has a higher tax liability. But at the same time, individuals take home higher pay after the deductions.
Both pre and post-tax deductions are voluntary. This means employees don’t have to agree to these deductions, and it’s not legally necessary to offer these deductions.
Calculating Your After-Tax Deductions
There are quite a few steps to calculate your after-tax deductions. Including all calculation steps may not be possible here, so we’re just showing some basic steps.
If you have pre-tax deductions, then those will be subtracted before withholding taxes. After that, FICA taxes need to be withheld. You also need to withhold taxes from Roth 401(K) from your income after the pre-tax deduction.
A mandatory component of payroll tax deductions is the FICA, or Federal Insurance Contributions Act tax, which includes taxes for social security and medical care. The employer needs to calculate and withhold this tax, which is 7.65 percent, from the taxable wages.
After subtracting the FICA amount from the gross pay, you need to subtract your additional taxes from this new amount. After this subtraction, you need to subtract the Roth 401(k) taxes, which is the after-tax deduction. And now you have the new income, also called the after-tax income.
Other Names for After-Tax Deductions
Another name for after-tax deductions that may appear in the forms is post-tax deductions. They usually don’t appear in W-2 form unless an individual makes voluntary after-tax contributions to unlisted items.