After-Tax Deduction

What Is an After-Tax Deduction?

An after-tax deduction, also known as a post-tax deduction, is an amount of money that is subtracted from a taxpayer’s earnings after taxes (federal, state, and local income, Social Security, and Medicare) are withheld. After-tax deductions can vary by state but may include:

• Roth 401(k) contributions
• Employer-sponsored pension plans
• 529 college savings plans
• Union dues
• Disability and certain life insurance policies
• Charitable contributions

Calculating After-Tax Deductions: An Example

Here’s a simplified example for calculating an after-tax deduction:

Caroline’s gross wages are $1,000. Her FICA taxes are 7.65%, her additional taxes total $75, and her Roth 401(k) after-tax deduction is 4%.

Here’s Caroline’s take-home pay once FICA, which includes Social Security, Medicare taxes, and other income taxes, has been withheld:

1. Multiply the gross pay by the FICA percentage: $1,000.00 X 0.0765 = $76.50
2. Multiply the gross pay by the deduction percentage: $1,000.00 X 0.04 = $40.00
3. Subtract the FICA amount from the gross pay: $1,000.00 - $76.50 = $923.50
4. Subtract the additional taxes from the new total: $923.50 - $75.00 = $848.50

We’ll pause here to point out that $848.50 would be what Caroline gets paid if not for her Roth 401(k) after-tax deduction, which hasn’t come out yet. That is what comes next:

1. Subtract the deduction amount from the new total: $848.50 - $40.00 = $808.50

Caroline’s take-home pay equals $808.50.

What Is the Difference Between Pre-Tax and After-Tax Deductions?

The main difference between pre-tax deductions and after-tax deductions is when the deductions are withheld from a paycheck. Pre-tax deductions are subtracted from the employee’s gross pay before taxes are withheld. After-tax deductions are subtracted from the employee’s net pay after taxes are withheld.

The primary advantage of pre-tax deductions is that they reduce the reportable W-2 income, effectively lowering the taxes due. The primary disadvantages are that the take-home pay is lower, and future benefit payments will be taxed upon withdrawal. Examples of pre-tax deductions include traditional 401(k)s, HSAs, FSAs, and health insurance.

So what are after-tax deductions' primary advantages? One is that future benefits (such as Roth IRA withdrawals) will not be taxed when done according to the rules. Another benefit is that take home pay may be a little higher. The primary disadvantage of post-tax deductions is that the tax liability is also higher.

Can Employees Opt Out of After-Tax Deductions?

Most after-tax deductions are voluntary, which means employees can opt out of them. The only exception to this general rule is wage garnishments. This is because wage garnishment orders are the only after-tax deductions handed down by a court. Because it is a legal issue, neither employees nor employers can choose not to participate.

What Are Examples of Post-Tax Deductions?

Here are some examples of after-tax deductions:

• Disability insurance
• Roth 401(k)
• Union dues
• Some healthcare benefits
• Transportation programs
• Schedule A deductions, which include:
  • Medical and dental expenses
  • Taxes you paid
  • Interest you paid
  • Gifts to charity
  • Casualty and theft losses
• Garnishments

It’s important for HR professionals and business leaders to understand how these after-tax payroll deductions work so they can craft solid benefits packages that help them attract and retain top talent.

Do After-Tax Deductions Show on W-2s?

Most of the time, only pre-tax deductions are shown on a W-2, but there are some circumstances when after-tax deductions are listed there as well. For example, voluntary after-tax contributions to a non-Roth pension plan can be listed in Box 14.