What Are Post-Tax Deductions?
Definition of Post-Tax Deductions
Post-tax deductions, also known as after-tax deductions, refer to the amounts subtracted from an employee’s paycheck after taxes and any applicable pre-tax deductions have already been withheld. These deductions may be optional, like Roth 401(k) contributions, or mandatory, such as garnishments ordered by a court.
Understanding the Role of After-Tax Deductions
It’s important to distinguish between pre-tax and post-tax deductions. Pre-tax deductions lower an employee’s taxable income because they’re taken out before payroll taxes are applied. In contrast, post-tax deductions are withheld after payroll taxes have been calculated, meaning they don’t reduce the employee’s taxable earnings.
Calculation Example:
Gross Pay – Pre-Tax Deductions – Payroll Taxes – Post-Tax Deductions = Net Pay
Since post-tax deductions don’t reduce taxable income, they don’t boost take-home pay the way pre-tax deductions might.
Common Examples of Post-Tax Deductions
- Roth 401(k) contributions or other after-tax retirement savings
- Group-term life insurance premiums exceeding $50,000
- Union dues
- Disability insurance (if not pre-tax qualified)
- Charitable donations through payroll
- Contributions to 529 college savings plans
- Garnishments for debt, unpaid taxes, child support, or court orders
What About Voluntary Benefits?
Voluntary benefits, like health plans, commuter accounts, or FSAs, are usually treated as pre-tax, as long as they meet the IRS guidelines. However, when a benefit doesn’t meet pre-tax criteria, it must be treated as a taxable, after-tax benefit.
When a Voluntary Benefit Becomes After-Tax:
- If it doesn’t qualify under IRS Section 125 or other pre-tax rules
- If employee contributions exceed legal annual limits (e.g., dependent care FSAs)
- If the plan structure doesn’t meet pre-tax guidelines set by the IRS
In those cases, the deduction is taken after taxes have been withheld.
Taxes That Apply to After-Tax Deductions
These deductions don’t reduce taxable wages and are still subject to:
- Federal income tax
- Social Security and Medicare
- State income tax (where applicable)
- Local income tax and payroll taxes, such as state disability insurance
Comparing Pre-Tax and Post-Tax Benefits
Pre-tax deductions usually provide more immediate tax savings, but after-tax options like a Roth 401(k) offer long-term benefits.
For example:
- With a Traditional 401(k), taxes are deferred until withdrawal.
- With a Roth 401(k), taxes are paid up front, but withdrawals in retirement are tax-free.
The Roth approach may benefit employees expecting to be in a higher tax bracket later in life.
Reporting Requirements for After-Tax Deductions
Since after-tax deductions are subject to taxation, employers must include them in the employee’s total taxable income on Form W-2. For example, any garnished wages must appear in:
- Box 1 for federal income tax
- Social Security and Medicare wage boxes
- State and local wage boxes, if relevant
Note: These boxes exclude pre-tax deductions since they reduce taxable wages.
Can Employees Claim Tax Deductions for After-Tax Benefits?
Yes, in some cases. If an individual pays for eligible expenses using after-tax wages, they may be able to deduct those costs at tax time, helping reduce overall taxable income.
