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Everyone loves payday, but seeing your gross income, which is what you earned, lined up next to your net income, which is what you got to keep, can make the whole thing feel a little bittersweet.
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Your employer withholds money from each paycheck to give to the IRS on your behalf to cover your income taxes and Medicare and Social Security payments — but taxes aren’t the only thing that can shrink your check before it ever hits your bank account.
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Your employer can — and sometimes must — withhold money from your paycheck for a variety of reasons, and whether that happens before or after the taxman gets his bite can have a big impact on your financial life.
Here’s what you need to know.
Understanding Pre-Tax vs. Post-Tax Deductions
Pre-tax deductions are when your employer pulls money out of your check before the IRS gets its claws on its share of your income. Although it would, of course, be nice if you could keep it all, pre-tax deductions can actually benefit you by reducing your taxable income. When your taxable income drops, so does the amount you owe the IRS.
In some cases, pre-tax deductions may even exempt you from local, state and federal taxes altogether. In other cases, pre-tax deductions only delay your tax obligations — 401(k) contributions, for example, are taxed when you begin making withdrawals in retirement later down the road.
Pre-tax deductions also lower your state and federal unemployment dues.
Post-tax deductions, on the other hand, are payroll deductions taken from an employee’s check after taxes have already been withheld. Post-tax deductions do not reduce your tax liability.
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Many of these deductions are voluntary, but in a few rare cases, employers are required to accurately withhold a portion of their workers’ checks.
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Common Pre-Tax Deductions
Employers withhold money from their employees’ paychecks for all kinds of reasons, mostly to pull their contributions to the benefits programs they’re enrolled in. Among the most common pre-tax contributions are:
- Health insurance contributions
- 401(k) plans and other retirement plans
- Disability insurance payments
- Employee commuting programs
- Child care plans
- Dental and vision plans
- Flexible spending accounts
- Health savings accounts
- Life insurance plans
- Medical expenses
- Parking permits
- Tax-deferred investments
Common Post-Tax Deductions
Some deductions are made after the employee’s taxes have already been withheld. Among the most common are:
- Roth IRA and Roth 401(k) retirement contributions
- Disability insurance
- life insurance
- union dues
- Charitable contributions
Some deductions on the list, like life insurance and disability insurance, might also be taken out as pre-tax deductions depending on how the employer’s benefits program is structured. Other deductions, like union dues and Roth retirement contributions, must be taken out after taxes have been paid.
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Wage Garnishments Are in a Class by Themselves
All of the post-tax deductions in the last section are voluntary deductions. One deduction, however, must be withheld on a post-tax basis and is never voluntary — wage garnishments. Wage garnishments happen when a court orders an employer to withhold a portion of an employee’s paycheck and remit it to the person or creditor to whom the employee owes an unpaid debt.
Among the most common wage garnishments have to do with:
- Tax levies
- Student loans
- Alimony and child support
- Credit card debt, medical debt, personal loan debt and debts to other private creditors
You Can’t Avoid Wage Garnishments—Especially When You Owe the IRS
In most cases, federal law allows creditors to garnish up to 25% of a worker’s wages. The IRS, however, plays by a completely different set of rules than creditors and the recipients of alimony and child support.
First of all, the IRS doesn’t need a court order — it can simply command an employer to begin garnishing an employee’s wages. Second, unlike the rest, the IRS isn’t limited to a percentage of your check — the agency is limited only by the amount of money that it’s required to leave taxpayers after garnishing their wages. Finally, federal tax liens take priority over all other creditors in almost all situations — if there’s a line, the IRS usually elbows its way to the front.
The Consumer Credit Protection Act prohibits employers from terminating workers over a single wage garnishment, even if there are multiple levies or proceedings brought to collect it. A second garnishment, however, is a fireable offense.
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About the Author
Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street’s investment community in New York City.