After-Tax Deduction

What is an after-tax deduction?

Payroll is not as simple as multiplying the number of hours worked by the rate per hour. An employee’s earnings are subject to several deductions before arriving at the net pay. A lot of businesses use a payroll provider to automate these calculations. While this is common practice, it is best to have an understanding of what these deductions are. Having a clear picture of how your take-home pay is computed is helpful for HR professionals and employees alike. 

Alternatively called post-tax deduction, an after-tax deduction is a particular amount of money that is subtracted from an employee’s salary after all applicable taxes have been withheld. What are employee taxes? These are federal, state, and local taxes, and FICA (Social Security and Medicare). An after-tax deduction is only taken out after the employee has paid taxes on that income. 

What are some examples of after-tax deductions?

In understanding after-tax deductions, it is important to note that these deductions are all voluntary. An employee must be aware of these deductions and agree to them before an employer makes the deductions. 

After-tax deductions vary but some common examples are:

• Retirement plan contributions like a Roth 401(k)
• Disability insurance
• Life insurance contributions
• Employer-sponsored pension plan contributions
• Charitable contributions
• College savings plans
• Union dues
• Garnishments 

As an employee, make sure to know what your after-tax deductions are to avoid any confusion or misunderstandings. 

How are Pre-tax and After-tax Deductions different from each other? 

The primary factor differentiating pre-tax and after-tax deductions are when they are taken out from an employee’s earnings.

• Pre-tax deduction 🡪 subtracted from earnings BEFORE taxes 
• After-tax deduction 🡪 subtracted from earnings AFTER taxes

Because pre-tax deductions are subtracted before taxes, they reduce the reportable W-2 income thereby lowering the taxable income of the taxpayer. Common examples of pre-tax deductions are health insurance and traditional 401(k)retirement plan. 

On the other hand, after-tax deductions do not have any effect on taxable wages because they are taken out after taxes. 

Understanding after-tax deductions with an example:

Understanding your paycheck and take-home pay is helpful. Though all the calculations can seem daunting at first, it’s good to know how much you earn and how much of that you bring home. 

Here is a basic example of how after-tax deductions work:

Let’s say that Mary’s gross salary is $500. Let’s remember these figures:

• Her FICA taxes (Social Security and Medicare) amount to 7.65% of wages. 
• Her additional tax is federal income tax which is $28. 
• Her Roth 401(k) after-tax deduction is 6%.

To calculate:

1. Find out how much FICA taxes (7.65%) to withhold from her gross salary of $500.

$500× 0.0765=$38.25

        2. Subtract FICA taxes from gross salary.

$500-$38.25=$461.75

        3. Subtract Mary’s additional tax (federal income tax).

$461.75 -$28=$433.75

        4. We can now proceed with the after-tax deduction for Mary’s Roth 401(k) which is 6%. Of gross salary. Let’s find out how much her after-tax deduction is using her gross salary.

$500 × 0.06=$30

This means that Mary’s after-tax deduction for her Roth 401(k) is $30.

        5. Subtract Mary’s after-tax deduction from her wage minus taxes which is the amount we calculated in Step 3.

$433.75 -$30=$403.75

This means that, after taking out taxes and after-tax deductions, Mary’s take-home pay is $403.75.