Are Tax Withholdings Pretax? – Avoid This Mistake + FAQs
- April 5, 2025
- 7 min read
Yes, most tax withholdings are post-tax, but some specific withholdings, such as traditional 401(k) contributions and health insurance premiums under Section 125 plans, are pretax.
In 2024, roughly 75% of U.S. taxpayers received a refund, averaging about $3,000 — clear evidence that many over-withhold taxes from their paychecks each year. By understanding which payroll deductions are pretax versus post-tax, you can take control of your take-home pay and avoid giving the IRS an interest-free loan.
This comprehensive guide demystifies tax withholdings, explains key IRS rules and state laws, and shows you how to maximize each paycheck legally. As of 2020, about 55 million Americans participated in 401(k) plans – all using pretax contributions to build retirement savings.
Even a single pretax benefit election can mean hundreds of dollars in tax savings annually, so let’s dive into how it all works.
🕵️♂️ Clear definitions of pretax vs post-tax payroll deductions – Understand these key terms and how they affect your paycheck.
💰 How pretax contributions (401(k), health insurance, etc.) can boost your take-home pay – See how these deductions lower taxable income and save you money.
⚖️ The laws and codes behind payroll taxes (IRS rules, FICA, state regulations) – Learn what federal and state laws say about your withholdings.
🚫 Common mistakes to avoid with tax withholdings – Avoid overpaying or underpaying taxes by sidestepping these pitfalls in managing pretax and post-tax deductions.
🗺️ A state-by-state guide to tax withholding differences – Discover how all 50 U.S. states handle pretax deductions and ensure you’re compliant wherever you work.
Tax Withholdings 101: Key Terms That Can Increase Your Take-Home Pay
Before diving deeper, let’s clarify the fundamentals. Tax withholdings and payroll deductions can be confusing, so understanding a few basic terms will help.
Below are key concepts you need to know:
Gross Pay: Your total earnings before any taxes or deductions. This includes wages, salary, and any other compensation you earn for the pay period.
Tax Withholding: The amount of tax your employer withholds (sets aside) from your paycheck to pay directly to the government. Federal and state income taxes are withheld based on your earnings and W-4 form information.
Pretax Deduction: A payroll deduction taken out before calculating taxes. Pretax deductions reduce your taxable income. By lowering the amount of income that is subject to tax, these deductions can decrease how much tax is withheld. (Examples: traditional 401(k) contributions, health insurance premiums under a Section 125 cafeteria plan.)
Post-Tax Deduction: A deduction taken out of your pay after taxes have been calculated and withheld. Post-tax deductions do not reduce your current taxable income. (Examples: Roth 401(k) contributions, union dues, wage garnishments, and the taxes themselves.)
Net Pay: Often called take-home pay, this is the amount you actually receive after all withholdings and deductions. Net pay = Gross pay minus all taxes (federal, state, local, Social Security, Medicare) minus any other pretax and post-tax deductions.
How Pretax Deductions Boost Your Take-Home Pay (With Examples)
Pretax deductions directly increase the percentage of your salary you get to keep. By subtracting certain expenses from your pay before taxes are applied, you end up owing less tax in that paycheck. In practical terms, this means you can receive more take-home pay and fund benefits or savings simultaneously. Let’s look at how this works in practice:
Scenario A – No Pretax Deductions: Imagine your gross pay for a period is $4,000 and you have no pretax benefits. All $4,000 is considered taxable. If, say, 20% of that goes to combined federal and state income taxes, about $800 would be withheld in taxes. After also subtracting Social Security and Medicare taxes, your take-home pay might be roughly $3,200 (plus you haven’t put anything into retirement or benefits in this scenario).
Scenario B – With Pretax Deductions: Now assume you contribute $400 to a traditional 401(k) and $200 to a pretax health insurance premium from that same $4,000. Your taxable income drops to $3,400. Using the same 20% tax rate example, only about $680 is taken out for income taxes. After FICA taxes, your take-home pay comes out around $2,720. On the surface, your net check is lower than in Scenario A, but remember you redirected $600 to your 401(k) and health coverage. Effectively, you only gave up $480 of spendable cash ($3,200 vs $2,720) to put $600 toward your future and benefits. The $120 difference is money saved on taxes in just that one pay period.
This simple example illustrates the core benefit of pretax withholdings: you get to allocate money to your savings or benefits before the tax man takes his cut.
Over a year, these tax savings can add up significantly, boosting your overall compensation value. In short, pretax deductions let you pay yourself first – to your retirement, health, or other benefits – while lowering your tax bill each paycheck.
Pretax vs Post-Tax Deductions: Examples You Should Know
Now that we’ve defined pretax and post-tax and seen how pretax savings can help, let’s identify which typical paycheck items fall into each category. Knowing these examples will help you recognize which parts of your pay are reducing your taxable income and which are not.
Common Pretax Payroll Deductions
Employer Retirement Plan Contributions (Traditional): Money you contribute to a traditional employer-sponsored retirement plan is pretax for income taxes. This includes 401(k) plans (common in the private sector), 403(b) plans (for nonprofit and education employees), and 457(b) deferred compensation plans (often for government employees). All reduce your federal (and usually state) taxable wages. (Note: These contributions are still subject to Social Security and Medicare taxes, which we’ll discuss later.)
Health Insurance Premiums: Premiums for medical, dental, and vision insurance are often deducted pretax if your employer offers a Section 125 cafeteria plan. This means your health insurance cost is taken out before taxes, lowering taxable wages. The result is that both you and your employer save on taxes for these premiums.
Flexible Spending Accounts (FSAs): If you put money into a Health Care FSA or Dependent Care FSA, those contributions come out pretax. For example, up to $5,000 per year for a dependent care FSA can be deducted before tax, helping you pay daycare expenses with pretax dollars.
Health Savings Account (HSA) Contributions: HSA contributions made through payroll (in conjunction with a high-deductible health plan) are pretax for federal income tax and FICA. (Be aware: a couple of states, like California and New Jersey, still tax HSA contributions at the state level.)
Commuter Benefits: Many employers offer pretax commuter programs for transit passes or parking. Money you set aside for public transit or parking (up to certain monthly limits set by the IRS) is not counted as taxable income.
Group-Term Life Insurance (up to $50k): If your employer provides group life insurance coverage, the premium for coverage up to $50,000 is not counted as taxable income to you. (Premiums for coverage above $50k are taxable, but the base coverage is a pretax benefit.)
Common Post-Tax Payroll Deductions
Income Tax Withholdings: The federal, state, and local income taxes withheld from your paycheck are post-tax by definition – they are the taxes. These amounts are taken out after calculating your taxable income. They don’t reduce your gross wages; they are the result of your taxable wages.
Social Security and Medicare (FICA) Taxes: Similarly, FICA taxes withheld from your pay are post-tax deductions. Every paycheck, 6.2% for Social Security and 1.45% for Medicare is taken out of your wage (up to certain limits for Social Security). These taxes are required and come out of your net pay (they do not lower your taxable income for income tax purposes).
Roth Retirement Contributions: If you contribute to a Roth 401(k) or Roth 403(b) option, those contributions are taken from your pay after taxes. You pay income tax on that money now (unlike a traditional 401k). The advantage comes later: qualified withdrawals from Roth accounts in retirement will be tax-free. But during your working years, Roth contributions reduce your take-home pay just like any other post-tax deduction.
Wage Garnishments and Child Support: Court-ordered withholdings like child support, tax levies, or other garnishments are post-tax. Your employer must withhold these from your paycheck (often after taxes have been accounted for). These payments don’t reduce your taxable income; they satisfy legal obligations.
Union Dues or Other Voluntary Deductions: If you pay union dues, donate to charity via payroll deduction, or purchase supplemental insurance that doesn’t qualify for pretax, those are post-tax deductions. They come out of your remaining pay after taxes. For instance, union dues are not tax-deductible on a pre-tax basis (though in some cases they might be deductible on your tax return, which is separate from payroll).
Avoid These Costly Tax Withholding Mistakes
Misunderstanding pretax vs post-tax or mismanaging your withholdings can cost you money. Here are some common mistakes employees make regarding payroll withholdings, and why you should avoid them:
Mistake 1: Assuming all withholdings are pretax. Just because money is taken out of your paycheck doesn’t mean it’s reducing your taxable income. For example, if you contribute to a Roth 401(k) or have a wage garnishment, those deductions don’t lower your current taxes. Always distinguish between pretax and post-tax deductions on your pay stub.
Mistake 2: Not taking advantage of available pretax benefits. Some workers forego enrolling in employer retirement plans or cafeteria plans, missing out on tax savings. If your employer offers a 401(k) match or pretax health insurance, not participating means you’re leaving both money and tax savings on the table.
Mistake 3: Over-withholding by not updating your W-4. Many people leave their Form W-4 set to withhold too much, resulting in big refunds. While a refund might feel nice, it means you gave the government an interest-free loan. It’s smarter to adjust your withholding so you get more in your paycheck throughout the year (while still covering your tax liability).
Mistake 4: Under-withholding and facing tax bills. The opposite problem is not withholding enough tax. If you withhold too little or don’t account for a second job or side income, you could owe a large bill (and possibly penalties) at tax time. Always review your withholding if your financial situation changes to avoid surprises.
Mistake 5: Ignoring state and local tax differences. A pretax deduction that saves federal tax might not save state or local tax. For instance, if you move from a state that fully conforms to pretax rules to one that doesn’t (like Pennsylvania), you could end up paying more state tax than expected. Make sure you’re aware of your state’s specific rules (see the state-by-state table below).
Federal Tax Law & Compliance: How the IRS Defines Pretax vs Post-Tax
The Internal Revenue Service (IRS) sets the ground rules for what counts as taxable income and what can be exempt as pretax benefits. Employers must comply with these rules when processing payroll. Here’s how federal law treats different aspects of your paycheck:
Federal Income Tax Withholding Rules
Taxable Wages Determination: For federal income tax withholding, “taxable wages” are your gross pay minus any pretax deductions. The IRS requires employers to calculate withholding based on this reduced taxable wage. That means if you have $500 in pretax deductions, the IRS only sees (and taxes) the remainder of your pay.
Form W-4 Impact: The amount of federal tax withheld also depends on the information you provide on your Form W-4 (such as filing status and dependents). However, no matter what you put on your W-4, pretax deductions will always reduce the wages that the withholding calculations are applied to. In other words, W-4 adjustments change how much tax is taken from taxable wages, but they don’t change what is considered taxable wages in the first place.
Compliance and Plan Requirements: The IRS only allows certain qualified benefits to be excluded from taxable income. For example, an employer must establish a formal Section 125 cafeteria plan for health premiums to be pretax, or a qualified retirement plan for 401(k) contributions. Employers follow IRS regulations (like those in the Internal Revenue Code and IRS Publication 15) to ensure only eligible deductions are treated as pretax. If a benefit isn’t sanctioned by the tax code as pretax, then those deductions are taken post-tax.
Social Security & Medicare (FICA) Taxes
Different Definitions of Wages: The term wages for Social Security and Medicare tax purposes (governed by FICA) isn’t exactly the same as for income tax. Some pretax deductions are also exempt from FICA, but others are not. For instance, your 401(k) contributions are still subject to Social Security and Medicare taxes (FICA) even though they are pretax for income tax. In contrast, health insurance premiums and FSA contributions under a cafeteria plan are exempt from FICA taxes as well as income tax.
Implications for Social Security Benefits: Because certain pretax deductions (like health premiums) reduce the earnings counted for Social Security, they can very slightly reduce your future Social Security benefits. However, the impact is usually minimal. (401(k) contributions don’t affect Social Security wages, so they have no impact on future Social Security benefits.)
Federal Unemployment (FUTA) and Other Taxes: Employers also pay taxes like FUTA (federal unemployment) on employee wages. Pretax deductions generally reduce the wage base for these employer-paid taxes, which slightly lowers the amount of unemployment tax an employer owes. While this doesn’t directly affect your paycheck, it’s part of why employers appreciate pretax structures as well.
State Tax Laws: Pretax Deductions Across All 50 States
State income tax laws can differ from federal rules. Most states with an income tax follow the federal treatment of pretax deductions (to keep things simple for taxpayers).
However, a few states have unique rules that may affect your take-home pay. Below is a state-by-state look at how pretax payroll deductions are handled:
| State | Pretax Deduction Treatment (State Income Tax) |
|---|---|
| Alabama | Follows federal guidelines on pretax deductions. (401(k) contributions, health insurance premiums, and other cafeteria plan deductions are excluded from Alabama taxable income.) |
| Alaska | No state income tax on wages (pretax vs post-tax does not apply). |
| Arizona | Conforms to federal pretax rules. (Pretax 401(k) contributions and Section 125 benefit deductions are not subject to Arizona state income tax.) |
| Arkansas | Follows federal treatment for pretax payroll deductions. (Retirement contributions and pretax benefits reduce Arkansas taxable income, just as they do federally.) |
| California | Mostly follows federal rules, except California does not recognize Health Savings Accounts (HSAs) as pretax. (HSA contributions are taxed by CA.) Other common pretax deductions like 401(k) and health premiums are excluded from CA income. |
| Colorado | Follows federal pretax deduction rules (no state differences; pretax contributions lower Colorado taxable income). |
| Connecticut | Conforms to federal law on pretax deductions. (401(k) deferrals, cafeteria plan benefits, etc., are pretax for CT income tax.) |
| Delaware | Follows federal treatment. (Pretax retirement and benefit deductions are exempt from DE state income tax.) |
| Florida | No state income tax on personal wages. |
| Georgia | Conforms to federal rules for pretax deductions (state taxable wages are reduced by 401(k) contributions, health premiums, etc., same as federal). |
| Hawaii | Follows federal pretax guidelines for income tax. (Pretax contributions and deductions are also pretax for HI state tax calculations.) |
| Idaho | Conforms to federal pretax deduction rules (no state-specific differences). |
| Illinois | Follows federal definitions of taxable income. (Pretax 401(k)/403(b) contributions and other qualifying deductions reduce Illinois taxable income.) |
| Indiana | Conforms to federal pretax rules (pretax contributions are excluded from IN taxable income). |
| Iowa | Follows federal treatment of pretax deductions (no special add-backs; pretax wages are excluded from IA taxable income). |
| Kansas | Conforms to federal pretax rules (pretax retirement and benefit deductions are not taxed by Kansas). |
| Kentucky | Follows federal pretax deduction rules. (KY taxable income is reduced by the same pretax payroll deductions as federal.) |
| Louisiana | Conforms to federal treatment (pretax deductions like 401k and health premiums are not subject to LA state tax). |
| Maine | Follows federal rules for pretax payroll deductions (no state adjustments; pretax contributions reduce ME taxable income). |
| Maryland | Conforms to federal pretax definitions (MD taxable wages exclude qualifying pretax deductions such as 401k contributions and health insurance). |
| Massachusetts | Follows federal treatment of pretax deductions (state taxable income is calculated similarly to federal, with 401k and other pretax benefits excluded). |
| Michigan | Conforms to federal pretax rules (pretax payroll deductions are also pretax for MI state income tax). |
| Minnesota | Follows federal pretax guidelines (pretax retirement and benefit contributions are excluded from MN taxable income). |
| Mississippi | Conforms to federal rules (pretax deductions like retirement contributions and health premiums reduce MS taxable income). |
| Missouri | Follows federal pretax deduction treatment (MO taxable income is reduced by qualifying pretax payroll deductions). |
| Montana | Conforms to federal pretax rules (pretax contributions are excluded from MT taxable income). |
| Nebraska | Follows federal treatment (pretax deductions reduce NE taxable wages just as they do federally). |
| Nevada | No state income tax on wages. |
| New Hampshire | No state income tax on wages (NH taxes only interest/dividends). |
| New Jersey | Partially conforms: New Jersey allows pretax treatment for 401(k) contributions and health insurance premiums, following federal. However, NJ does not exclude contributions to 403(b), 457(b), or other deferred comp plans – those are taxed by NJ. Also, New Jersey does not recognize HSAs as pretax (HSA contributions are added back as taxable for NJ state tax). |
| New Mexico | Follows federal pretax deduction rules (pretax contributions are excluded from NM taxable income). |
| New York | Conforms to federal definitions of taxable wages. (Pretax deductions like 401(k) and cafeteria plan benefits are also pretax for NY state income tax.) |
| North Carolina | Follows federal pretax rules (pretax payroll deductions reduce NC taxable income in the same way as federal). |
| North Dakota | Conforms to federal treatment (pretax contributions are excluded from ND taxable income). |
| Ohio | Follows federal pretax guidelines (OH taxable wages are reduced by qualifying pretax payroll deductions). |
| Oklahoma | Conforms to federal treatment (pretax retirement and benefit deductions are not included in OK taxable income). |
| Oregon | Follows federal pretax rules (pretax deductions reduce OR state taxable income just as they do federally). |
| Pennsylvania | Does not follow federal pretax rules. Pennsylvania taxes almost all gross wages with few exclusions. Employee contributions to retirement plans like 401(k) are taxable in PA (no pretax break). Likewise, Pennsylvania does not exclude employee-paid health insurance premiums from taxable income. (Note: PA does allow separate deductions for certain savings accounts like Health Savings Accounts and 529 plans on your PA tax return, but these are after-the-fact adjustments; your paycheck withholdings in PA do not get pretax treatment for those contributions.) |
| Rhode Island | Follows federal pretax deduction rules (pretax contributions are excluded from RI taxable wages). |
| South Carolina | Conforms to federal pretax treatment (pretax deductions reduce SC taxable income). |
| South Dakota | No state income tax on wages. |
| Tennessee | No state income tax on wages. |
| Texas | No state income tax on wages. |
| Utah | Follows federal pretax rules (pretax deductions reduce UT taxable income in line with federal law). |
| Vermont | Conforms to federal treatment (pretax payroll deductions are excluded from VT taxable income). |
| Virginia | Follows federal pretax deduction rules (pretax contributions are not taxed by VA). |
| Washington | No state income tax on wages. |
| West Virginia | Conforms to federal rules for pretax deductions (WV taxable income excludes qualified pretax contributions). |
| Wisconsin | Follows federal pretax treatment. (Pretax retirement contributions and other eligible deductions reduce WI taxable income, same as federal.) |
| Wyoming | No state income tax on wages. |
Pros and Cons of Pretax Contributions
Choosing between pretax and post-tax contributions can have trade-offs. Here’s a summary of the advantages and disadvantages of using pretax payroll deductions:
| Pros of Pretax Deductions | Cons of Pretax Deductions |
|---|---|
| Immediate tax savings on each paycheck (lowers your current taxable income, so you pay less tax now) | Taxes are deferred, not eliminated (e.g. you’ll pay taxes later on traditional 401(k) withdrawals since you got the break up front) |
| Higher take-home pay compared to making the same contributions after-tax (the government in effect subsidizes part of your retirement or benefit contributions) | Funds often have restrictions or delayed access (money in a 401(k) generally can’t be used until retirement without penalty; FSA funds must be used for qualified expenses, etc.) |
| Can reduce your adjusted gross income (AGI), which might help you qualify for other tax breaks (e.g. certain credits or deductions that phase out at higher incomes) | May slightly reduce income-based benefits or future Social Security amounts (because pretax deductions like health premiums lower the wage counted for those calculations; impact is usually minor) |
| “Pay yourself first” convenience: builds savings or benefits automatically; you are investing in retirement or coverage before you can spend the money, instilling financial discipline with tax benefits | Complexity and rules to follow: pretax plans have contribution limits and eligibility requirements. You must adhere to IRS rules (like use funds for intended purpose) or risk losing the tax advantage. |
| Even saves on payroll taxes in some cases – certain pretax deductions (like Section 125 health plans) also avoid Social Security and Medicare taxes, saving you and your employer additional money | Not always the best choice for every benefit: for example, if you pay disability insurance premiums with pretax dollars, any disability benefits you receive would be taxable (whereas post-tax premiums would make the benefits tax-free). Consider your specific needs. |
Frequently Asked Questions (FAQs)
Are Roth 401(k) contributions taken out pretax? No. Roth 401(k) contributions are taken from your paycheck after taxes. They don’t reduce your taxable income now (but qualified withdrawals in retirement will be tax-free).
Do pretax deductions also avoid Social Security and Medicare taxes? Some do, some don’t. For example, health insurance premiums and FSA contributions are exempt from Social Security/Medicare (FICA) tax, but 401(k) contributions are still subject to FICA taxes.
How can I tell if a deduction is pretax on my pay stub? Pretax deductions are often labeled. A good hint is to compare your gross pay to taxable pay on the stub – if taxable pay is lower, the difference is due to pretax deductions.
Can I change how much tax is withheld from my paycheck? Yes. You can adjust your federal withholding by submitting a new Form W-4 to your employer (and a state W-4 if applicable). This changes the tax withholding amount, not which deductions are pretax.
Does state tax withholding reduce my federal taxable income? No. State income tax withheld from your paycheck is a post-tax deduction – it doesn’t reduce your federal taxable income.
Is a traditional IRA contribution pretax? Not in your paycheck. IRA contributions are made from your take-home pay (post-tax). If you qualify, you can take a deduction on your tax return, but they don’t reduce payroll withholdings.
If my employer withholds taxes, do I still need to file a tax return? Usually yes. Withholding is just a prepayment of tax. You must still file an income tax return to reconcile your actual tax owed and claim any refund or pay any remaining amount due.