The Difference Between Pre-tax and Post-tax Benefits

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One advantage of strong economies is that employers can afford to offer more robust benefit packages to employees. When your employer presents you with a list of options available, it comes with a lot of pre-tax and post-tax chatter. All deductions for benefits affect your take home pay. You'll want to understand how to distinguish between the two so you can make more informed decisions when it's time to enroll in your company's plans.

Gross Wages

To understand how pre-tax and post-tax benefits work, you must know what your gross wages are. This is the starting number your employer uses for calculations. Your gross wages are the amount of your check before any other taxes or benefit deductions are subtracted. If you are paid by the hour, your gross wage is the total number of hours you work in a pay period, multiplied by your hourly pay rate. If you are salaried, you are usually paid the same amount each pay period. If you also earn commission or bonuses, add the amount to your total gross wage figure.

Pre-tax Benefits

Pre-tax benefits are subtracted from your gross wages after Social Security and Medicare tax is calculated, but before income tax is calculated. As of 2015, Social Security is taxed at 6.2 percent and Medicare tax is calculated at 1.45 percent. After your employer subtracts these amounts, your pre-tax benefits are subtracted from the result. Because your pre-tax benefits are paid before income tax is calculated, you do not pay income tax on the money used to pay for pre-tax benefits, and your taxable income is lower. Some pre-tax benefits include health insurance and 401k contributions.

Post-tax Benefits

After Social Security, Medicare and pre-tax benefits are subtracted from your gross wages, your employer calculates your income tax on the remaining amount. After income tax is calculated and deducted, your post-tax benefits are paid with your remaining wages. Because all pre-tax items and taxes have already been accounted for, you pay tax on the money you use to buy post-tax benefits. Some post-tax benefits include voluntary life insurance premiums, accident insurance premiums, Roth 401k contributions and long-term care insurance.

Voluntary vs. Involuntary Benefits

Some benefits you receive at work are voluntary, and you decide whether you want to purchase them. Other benefits are mandatory, and the benefits are deducted regardless of whether you want them or not. Most benefits are voluntary. However, some employers, such as Victor Valley College, require workers to contribute to the state Public Employee Retirement Account. This is an involuntary benefit deduction.