What are post-tax deductions? Exploring payroll deductions

A post-tax deduction is an amount withheld from an employee’s paycheck after deducting all applicable taxes. These deductions do not reduce the employee’s taxable income, making them different from pre-tax deductions, which are subtracted from gross income before tax computations. 

Examples of post-tax deductions include Roth 401(k) contributions, union dues, and some types of insurance premiums (more on this below). Unlike their pre-tax counterparts, these funds can typically be accessed without incurring additional tax liabilities. 

HR professionals must accurately manage and communicate the implications of post-tax deductions, as they directly impact net income, employee satisfaction, and financial planning. Proper management is a cornerstone of responsible payroll administration, so a solid understanding is necessary to ensure regulatory compliance and foster transparent employer-employee interactions.

Pre-tax vs. post-tax deductions

Both pre-tax and post-tax deductions are integral to payroll administration. The difference between them is in their interaction with taxable income. 

Pre-tax deductions are subtracted from an employee’s gross income before tax calculations, reducing the individual’s overall taxable income. This can yield significant tax savings and is commonly applied to health insurance premiums, transportation expenses, and retirement contributions, such as a traditional 401(k).

Conversely, post-tax deductions occur after tax computations, meaning they don’t influence taxable income. These deductions include Roth 401(k) contributions and some insurance premiums. As such, post-tax deducted funds can often be accessed without further tax implications. 

Knowledge and proper administration of these deductions help facilitate regulatory compliance, optimize employees’ net income, and aid in comprehensive financial planning. 

Post-tax deduction examples

As noted above, post-tax deductions are amounts subtracted from an employee’s paycheck after all applicable taxes have been calculated and subtracted from their gross salary. These deductions are diverse and reflect various aspects of an employee’s personal, financial, and occupational interests.

One of the most common examples of post-tax deductions is Roth 401(k) contributions. While these contributions don’t lower taxable income in the year they’re made—unlike a traditional 401(k)—they allow for tax-free growth and withdrawal at retirement.

Insurance premiums can also be post-tax deductions. Depending on the specific policy, life, disability, and certain health insurance premiums may be deducted after taxes. However, this isn’t always the case, as some insurance premiums can be pre-tax based on the plan’s structure and tax laws.

Union dues are another typical post-tax deduction, where employees who belong to a union have their dues deducted after tax calculations.

Charitable donations through payroll, personal loan repayments, and garnishments—like child support or tax liens—are other instances of post-tax deductions. 

Each type of deduction has tax implications and potential benefits (and drawbacks). 

Do post-tax deductions show on a W-2?

Yes, certain post-tax deductions appear on Form W-2, but it depends on the nature of the deduction. 

For instance, Roth 401(k) contributions, a common type of post-tax deduction, are reported in Box 12 of the W-2. This part of the form is designated by the code AA, and it allows the Internal Revenue Service (IRS) to track the amount contributed to a Roth 401(k) and ensure the individual doesn’t exceed the maximum annual contribution. 

However, not all post-tax deductions appear on this form. Many, such as union dues and life insurance premiums, don’t have designated reporting boxes on the W-2 form. These deductions appear on pay stubs rather than the W-2, which can lead to confusion. Some professions allow employees to deduct union dues as a business expense using Form 2106. Life insurance premiums, on the other hand, are considered a personal expense for tax purposes because the government doesn’t require anyone to have this type of policy.

To avoid confusion and ensure employee understanding, HR professionals should be prepared to clarify these distinctions to ensure accurate tax reporting and make sure that employees know the details of their total compensation package.