If you’re offering benefits to your employees, you’re likely wondering how you can withhold wages for the proper benefits, and whether you do so before or after taxes. Understanding the difference between pre-tax and post-tax deductions is crucial – and that’s why we’re here to help. We’ve put together this helpful guide to clear up the distinction between these deductions and how to navigate them properly.
Pre-Tax Deductions
Pre-tax deductions are withheld from your employee’s wages before tax, and they reduce the income that your employee will need to pay tax on.
Common pre-tax deductions include:
- Retirement plans and superannuation
- Salary sacrifice items, such as laptops and cars
- Life and health insurance
- Transportation programs and parking expenses
- Medical expenses
Let’s look at some particular common deductions in more detail.
Work Place Giving Deductions
If your employee regularly donates to charitable organisations, they can claim these donations as a pre-tax or post-tax deduction. If they plan to donate before tax, the amount they donate reduces the total pay which attracts withholding tax. If they give their donation post-tax, their taxable income won’t be reduced and they might opt for claiming their donation as a tax deduction when compiling and submitting their tax return.
Salary Sacrifice Superannuation Deductions
Within these deductions, your employee sacrifices a determined amount or a percentage of your wages pre-tax, which is paid into their superannuation fund. The sacrificed amount doesn’t reduce the employer’s superannuation payments.
Results Of Pre-tax Deductions
Once these items are deducted from an employee’s pay, the government then calculates the total tax payable.
Pre-tax deductions result in lower tax obligations for you and your employee, though your employee may end up owing tax when they use these benefits. Not all benefits are exempt from federal, state and local taxes, so it’s important you check relevant legislation to ensure you’re aware of what’s involved.
Post-Tax Deductions
Post-tax deductions are withheld after you withhold taxes from your employee’s wages, and they’ll have no impact on your employee’s taxable income.
Common post-tax deductions include:
- Retirement plans
- Life and disability insurance
- Union wages
Let’s consider some of these deductions in more detail.
Union Or Professional Association Fees
These are deductions in which employees contribute towards their membership of a professional organisation or union body.
Child Support
Child support payment deductions are drawn from wages and paid through Services Australia. Child support payment deductions consider a portion of an employee’s wages as a Protected Earnings Amount (PEA), which remains free from withholding.
Results Of Post-Tax Deductions
Post-tax deductions are subtracted following payroll tax deductions. Both you and your employee will end up owing more payroll tax, but your employee won’t incur tax on the benefits when using them down the line. As you withhold taxes before benefit contributions, all taxes at federal, state and local levels are already paid.
Applying These Deductions
There are clear distinctions between pre-tax and post-tax deductions.
With pre-tax deductions, as your employee will need to pay tax on a lower income, they’ll attract a greater net pay. This can be especially helpful if a person has significant upfront expenses, such as rent, groceries, and medical bills.
Post-tax deductions result in a person paying more in tax down the line and receiving a lesser net pay. They will, however, not need to owe taxes in the future as they’ve already contributed these deductions.
For quality taxation advice when you need it most, contact Blue Orchid Accounting. Established in 2011, we’ve provided our Central Coast clients with comprehensive tax and accounting services tailored to their individual needs. With our friendly, honest advice you’ll be equipped to make the most educated financial decisions and ensure your wealth is protected. Get in touch with us today on 1800 008 664.
Since 2011, Blue Orchid Accounting has been providing clients throughout the Central Coast with a comprehensive range of taxation and accounting services. We strive to provide friendly, straightforward advice, helping ensure you’re enabled to make smarter financial decisions and further safeguard your wealth.
