What are pre tax deductions

what are pre tax deductions

Qualified Pre Tax Deduction

A qualified pre tax deduction is taken from your income before the tax is levied on it. It therefore never appears on your employer’s quarterly reporting form 941 or your form W-2.

A qualified pre tax deduction is a term used to describe a deduction from your income that is taken before your taxable income is computed for the purpose of determining tax liability. It does not appear on your employer’s quarter report, form 941, to the IRS and it does not appear on your form W-2. This means that it reduces your federal tax, state tax, and even FICA tax by reducing the taxable income.

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One common form of qualified pre tax deduction is used for parking expenses for employees. This type of deduction is done in three different ways. They are employer paid pre tax deduction, employee paid pre tax deduction, or a combination of both. In the employer paid method, the employer pays the employee a set sum of money. This money can be used for parking expenses, transit expenses, or vanpool expenses. The sum may be up to $100 per month.

Some of the qualified pre tax deductions plans work by a combination of employee contributions and employer contributions. The University of Chicago offers a voucher plan where the employee elects to have a

certain amount deducted on a pre tax basis from their pay and this amount is placed in a transit fund. The transit fund issues vouchers to the employees that can be used to pay for public transportation. The limit of contributions to the plan is $65 per month for each employee.

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Another example of a qualified pre tax payroll deduction is the contribution to a personal 401(k) plan. The yearly limit on such contributions have has been set at $15,500 for the tax years of 2007 and 2008. Individual employers, who administer the plans, might set a lower limit for their employees. If they do, the employer’s limits are in force for the plan. Regardless, the amount contributed to the plan is deducted from income before the payroll taxes are computed. At the end of the year, as with all qualified pre tax deductions, they will not appear on the employees form W-2.

There are various other types of qualified pre tax deductions. Remember, the important points about qualified pre tax deductions are that they must be qualified. In other words, there are only certain deductions allowed and they are usually subject to limits. Also, they do not appear as taxable income, so they can be safely ignored on your tax report. The inherent tax benefit is realized via the reduction of taxable income.

Source: businesstaxrecovery.com

Category: Taxes

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