Pre-tax deduction: what it is and how it changes your paycheck

What a pre-tax deduction is

Some things you pay for through your employer come out of your pay first, and tax is figured on what is left. The IRS says a cafeteria plan, including an FSA, gives participants a chance to receive qualified benefits on a pre-tax basis. The benefits it can include are health coverage, dependent care assistance, group-term life, adoption assistance and health savings accounts.

A traditional 401(k) works the same way for income tax. The IRS says these contributions are generally not subject to income tax withholding when deferred, and are left out of box 1 of your W-2.

What it does to your paycheck

It lowers your taxable pay, so you pay less income tax. It does lower your take-home, but by less than the amount you put in, because part of it comes back as tax you did not pay.

Pre-tax does not always mean no tax at all. For a 401(k), the IRS notes the contributions are still wages for Social Security and Medicare. They are taxed later, when you take the money out in retirement.

Pre-tax vs after-tax

An after-tax deduction is taken after tax is figured, and does not lower your tax. A Roth 401(k) is an example: the IRS notes some plans offer after-tax designated Roth contributions. On a pay stub, look at the section names to see which deductions are which.

For a couple, the choice affects the whole household. A pre-tax deduction in a higher-income person's pay saves more tax at their higher bracket.

A worked example: $125 into a 401(k) each paycheck

• Pay: $65,000 a year, single, paid every two weeks. Contribution: $125 x 26 = $3,250 a year.
• Taxable pay for income tax: $65,000 - $3,250 = $61,750. Less the 2026 standard deduction of $16,100: $45,650.
• Tax: 10% on $12,400 = $1,240, plus 12% on $45,650 - $12,400 = $33,250, which is $3,990. Total $5,230.
• Without the contribution the tax is $5,620 (taxable $48,900).
• Tax saved: $5,620 - $5,230 = $390 a year, which is 12% of $3,250.
• So the $125 reduces take-home by about $110 a paycheck: $125 - ($390 / 26 = $15).