Pre-Tax Deductions on Your W2 Explained

A pre-tax deduction is an amount your employer subtracts from your gross earnings before calculating income taxes. This process lowers your taxable income and can result in a lower tax bill for the year. These deductions are detailed on your annual Wage and Tax Statement, Form W-2.

Common Pre-Tax Deductions Explained

Many employers offer retirement savings plans that allow for pre-tax contributions. The most common is the 401(k) plan, offered by private companies. For 2025, you can contribute up to $23,500 of your salary before taxes are calculated. Employees age 50 and over are permitted to make additional “catch-up” contributions of $7,500, and a newer provision allows those aged 60 to 63 to contribute an even higher catch-up amount of $11,250, if their plan allows it.

A 403(b) plan is a similar retirement savings vehicle offered by public schools, certain non-profit organizations, and churches. The contribution limits for a 403(b) are the same as for a 401(k), allowing employees to defer up to $23,500 in 2025. These plans also feature the same age-based catch-up contribution rules.

A Health Savings Account (HSA) is a tax-advantaged savings account that can only be used in conjunction with a high-deductible health plan (HDHP). For 2025, the IRS allows individuals with self-only HDHP coverage to contribute up to $4,300, while those with family coverage can contribute up to $8,550. Individuals aged 55 and older can contribute an additional $1,000 per year, and the funds in an HSA roll over year after year and can be invested, growing tax-free.

A Flexible Spending Account (FSA) allows employees to set aside money for out-of-pocket healthcare costs. For 2025, an employee can contribute up to $3,300 through payroll deductions. Unlike an HSA, FSAs are subject to a “use-it-or-lose-it” rule, meaning funds must be spent within the plan year. However, employers may offer a grace period of up to two and a half months or permit a carryover of up to $660 into the next year.

Other common pre-tax deductions include premiums for employer-sponsored insurance and commuter benefits. The portion of the premium you pay for health, dental, or vision insurance is often deducted from your paycheck before taxes under a Section 125 cafeteria plan. Commuter benefits allow employees to set aside pre-tax funds for work-related transit and parking expenses. For 2025, the monthly limit for qualified transit passes is $325, and the separate limit for qualified parking is also $325.

How Deductions Affect Your Taxable Wages

The impact of pre-tax deductions on your paycheck is not uniform across all types of taxes, which is reflected in different boxes on your Form W-2. Box 1 reports your “Wages, tips, other compensation,” which is the figure used to calculate your federal income tax. This amount is reduced by most pre-tax deductions, including retirement contributions and insurance premiums.

Box 3 shows your “Social Security wages.” A difference from Box 1 is that contributions to retirement plans like a 401(k) or 403(b) do not reduce your Social Security wages. For example, if your gross pay is $60,000 and you contribute $6,000 to a 401(k), your Box 1 wages will be $54,000, but your Box 3 wages will remain $60,000.

Box 5 reports your “Medicare wages and tips.” Similar to Social Security wages, your contributions to a 401(k) or 403(b) do not reduce the wages reported in Box 5. So, in the previous example, your Box 5 wages would also be $60,000. There is no annual wage limit for Medicare tax, whereas Social Security wages are capped at an annually adjusted amount.

In contrast to retirement contributions, deductions made under a Section 125 cafeteria plan lower your taxable wages for federal income tax, Social Security, and Medicare. These plans include health, dental, and vision insurance premiums, as well as contributions to an HSA or FSA. This means these specific deductions reduce the amounts reported in Box 1, Box 3, and Box 5.

Finding Pre-Tax Deductions on Form W-2

Your Form W-2 contains specific boxes to report the pre-tax deductions you have taken throughout the year. The most detailed information is in Box 12, which uses letter codes to identify various types of compensation and benefits. Your employer will enter a specific code and the corresponding dollar amount to report contributions to different plans.

Box 12

Several common codes in Box 12 relate directly to pre-tax deductions. Code D is used for elective deferrals to a 401(k) plan, while Code E signifies contributions to a 403(b) plan. If you contribute to a Health Savings Account (HSA) through payroll deductions, this will be reported with Code W. Some Box 12 codes are for informational purposes and may not represent a deduction from your pay, such as Code DD, which reports the total cost of employer-sponsored health coverage.

Box 14 Other

Box 14, labeled “Other,” is a flexible space for employers to report information that does not have a dedicated box elsewhere on the W-2. This can include pre-tax deductions not covered by the standardized codes in Box 12, like commuter benefits or union dues.

Unlike the standardized codes in Box 12, the descriptions used in Box 14 can vary between employers. An employer might use their own abbreviation, such as “S125” for health insurance premiums. If you see an unfamiliar description in Box 14, you may need to consult your employer’s human resources or payroll department for an explanation.