A deduction from wages taken before income tax (and sometimes FICA) is calculated, reducing taxable income.
Pre-tax deductions reduce the wage amount subject to taxation. Most common: Section 125 cafeteria plan elections (health, dental, vision premiums; FSA contributions), 401(k) traditional contributions, HSA contributions, qualified transportation fringe benefits.
For employees, pre-tax deductions reduce both federal income tax and (for most categories) FICA wage base — saving roughly 25-35% of the deduction amount depending on bracket. Employers also save the FICA employer match on the reduced wage base.
A deduction from wages taken before income tax (and sometimes FICA) is calculated, reducing taxable income.
Pre-tax deductions reduce the wage amount subject to taxation.
Most PEO buying decisions touch several related concepts at once. Pre-tax payroll deduction typically comes up alongside the other terms in this category. Closely related terms include Cafeteria plan (Section 125), 401(k) plan, Federal Insurance Contributions Act (FICA).
This is one entry from our PEO glossary covering payroll, benefits, workers comp, HR compliance, and PEO mechanics. Browse all terms.
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