After Tax Deductions-Revised

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copyright-2010-corbiscorporation-10 Term Definition After tax deductions are made after applicable payroll taxes are deducted and pre-tax deductions are made from employee wages.

Extended Definition

After tax deductions are payments that are automatically deducted from employees’ post-tax income (the amount that remains after payroll taxes have been deducted and pre-tax deductions from paychecks have been made). The voluntary deductions are done for benefits sponsored by employees, such as disability insurance and Roth 401k contributions. Employees can choose to stop voluntary payroll deduction benefits at any time of the year because after tax deductions have no effect on their taxable wages.

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After tax deductions are made to the amount of employee wages that remain after payroll taxes have been deducted and pre-tax deductions have been made.
A Closer Look at After Tax Deductions Employers can initiate pre-tax and after tax deductions from employee paychecks. Pre-tax deductions lower taxable wages as they occur before withholding the payroll taxes. This includes dental and medical premiums, parking fees, flexible spending accounts and 401k plans. Post tax deductions occur after withholding of payroll taxes, and do not have any impact on taxable wages. These deductions include union dues, Roth 401K, life and disability insurance, and charitable contributions.

An example of after tax deduction

The entries for both types of deductions are the same. The difference lies in the tax amounts deducted and the net employee pay as a result of this deduction. For instance, take employees who make $2000 and have 15% of their salary deducted for income taxes and another $100 towards an after tax credit union deduction. This amounts to taxes of $300 and a net pay of $1700. Should the employees decide to change their deductions from the after tax to a before tax 401k deduction, the tax amount withheld will change. The $100 will be deducted from pay before calculation of taxes, with the tax being calculated on $1900. This will result in a deduction of $285, which will result in a specific net pay pending the 401(k) deduction. The employee can take home a bigger pay by changing the withholding to a before tax deduction.

Voluntary deductions: Employers are not legally required to offer voluntary deductions nor do they have to agree to them. All involuntary deductions, however, must be withheld from employee paycheck.

401(k) – Employees can choose to contribute a certain amount towards their 401(k) retirement plan every pay date. Employees can contribute a matching amount to their employees’ 401(k). They have to adhere to the contribution limit (for each year) set by the government. The most common post-tax 401(k) plan sponsored by employers is the Roth 401(k).

Payroll deduction IRA: Another option employers can offer is the IRA (Individual Retirement Account) where employees need to fund their own accounts; this does not include an employer match. The contribution limit for IRAs is lesser than 401(k) plans. The payroll deductions can be post-tax or pre-tax.

Health insurance and additional coverage: Health insurance deductions can be after tax or pre-tax. Employers are not mandatorily required to offer health insurance to employees. They can pay a portion of the insurance or all of it. After tax deductions apply to employees who buy additional coverage with the employer-provided basic life insurance.

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