Are Benefits Taken Out Before Taxes?

Your paycheck includes several deductions that reduce your gross earnings to your final take-home pay. These are categorized based on when they are taken relative to taxes, a distinction that impacts your overall compensation.

Some benefits are paid with pre-tax dollars, meaning the cost is subtracted from your gross wages before federal, state, and local income taxes are calculated. This process lowers your taxable income. Other deductions are post-tax, taken from your paycheck after all applicable taxes have been withheld.

Common Pre-Tax Benefit Deductions

Many employers offer benefits through a Section 125 cafeteria plan, which allows you to pay for certain qualified benefits using pre-tax dollars. The most common of these are premiums for health, dental, and vision insurance. By paying for these coverages before taxes are assessed, you reduce the total income subject to taxation.

Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are also pre-tax benefits. An HSA is a savings account paired with a high-deductible health plan, and for 2025, you can contribute up to $4,300 for self-only coverage or $8,550 for family coverage. FSAs allow you to set aside money for healthcare or dependent care expenses, with 2025 contribution limits of $3,300 for a health FSA and $5,000 per household for a dependent care FSA.

Retirement savings are another area for pre-tax contributions. Traditional 401(k) and 403(b) plans allow you to defer a portion of your salary into a retirement account, lowering your current taxable income. For 2025, the employee contribution limit for these plans is $23,500, and an additional catch-up contribution of $7,500 is available for those age 50 and over.

Other pre-tax benefits include commuter benefits and group-term life insurance. Under Internal Revenue Code Section 132, employees can use pre-tax funds for qualified transit and parking expenses. For 2025, the monthly limit for both qualified parking and transit passes is $325. The premiums for the first $50,000 of coverage in an employer-provided group-term life insurance plan are also excluded from your taxable income.

Common Post-Tax Deductions

Post-tax deductions are taken from your earnings after income and employment taxes have been calculated, reducing your net take-home pay but not your taxable income. A primary example is contributions to a Roth 401(k) or Roth 403(b) retirement plan. Roth contributions are made with after-tax dollars, offering the advantage of tax-free qualified withdrawals in retirement.

Premiums for certain types of insurance are also paid on a post-tax basis, including short-term and long-term disability insurance. While paying with post-tax money means no immediate tax savings, it ensures that any disability benefits you receive are generally not subject to income tax. Premiums for employer-provided group-term life insurance coverage that exceeds the $50,000 threshold are also handled on a post-tax basis.

Certain other payroll deductions are mandatory and always handled post-tax. Wage garnishments, which are court-ordered withholdings to pay a debt such as child support or unpaid taxes, are taken from your net pay after all taxes are accounted for. Voluntary deductions, such as union dues or charitable contributions made directly through your company’s payroll system, are also post-tax deductions.

How Deductions Impact Your Taxable Income

Pre-tax deductions lower the amount of your income subject to taxation, but the specific taxes they affect can differ. Most health and welfare benefits, including insurance premiums, HSA contributions, and FSA funds, reduce your income for federal income tax, state income tax, and Federal Insurance Contributions Act (FICA) taxes. FICA taxes are the 6.2% Social Security tax and 1.45% Medicare tax.

Retirement plan contributions operate differently. When you contribute to a traditional 401(k) or 403(b) plan, those pre-tax deductions lower your income for federal and state income tax purposes. However, these contributions are still subject to FICA taxes, meaning you will still pay Social Security and Medicare taxes on your gross wages before this deduction.

To illustrate, consider an employee with a gross bi-weekly pay of $2,500 who elects to have a $150 health insurance premium and a $100 traditional 401(k) contribution deducted.

The $150 health premium is exempt from both income tax and FICA tax, while the $100 401(k) contribution is exempt from income tax but not FICA tax. Their income subject to FICA tax is $2,350 ($2,500 – $150). Their income subject to federal and state income tax is $2,250 ($2,500 – $150 – $100), resulting in lower tax withholding.