A pretax item on your check means something has been deducted from your pay before taxes are calculated. This means the amount of your taxable pay is lower than it would be if you didn't have any pretax items, and the amount of tax taken from your check is also lower. Pretax deductions also allow you to pay for certain benefits before you get your check. This means you’ll have fewer expenses to worry about when you get your take-home pay.
Income Tax Calculations
All pretax items on your check are exempt from federal and state income tax. This means the money used to pay for pretax items is not included in your taxable income. Your employer will subtract the cost of pretax deductions from your gross pay and use the result to calculate your income tax.
Social Security and Medicare Tax Calculations
Many pre-tax deductions on your check are also exempt from Social Security and Medicare taxes, but some are not. 401k contributions are an example of a pretax deduction in this category. The portion of your pay check that you put in a 401k is not included for federal income tax calculations, but it is included for Social Security and Medicare calculations. On your W-2, you’ll notice that your gross income is less than your income subject to Social Security and Medicare. This is normal when you have pretax deductions that aren't exempt from all withholding taxes.
Types of Pre-Tax Deductions
Examples of common pre-tax deductions include health insurance premiums, term life insurance, tuition assistance and contributions to health savings accounts. These pretax items are not subject to income or Social Security and Medicare taxes, and most pretax deductions fall in this category. Pretax benefits such as adoption assistance payments and certain retirement plan contributions are examples of those not subject to income tax, but are subject to Social Security and Medicare tax. If you have questions about the treatment of a specific pretax item on your check, ask your employer for details.
Tax Return Deductions
In most cases, you can’t take a deduction for any pretax items taken from your paycheck. Since you don’t pay tax on the income used to pay for these items, you already get a tax benefit from them. If you took a deduction on your tax return for the same item, you would be reducing your taxable income again by the same amount. This is called a double benefit, and the IRS doesn't allow you to do this.