What are Pretax Deductions?

A pretax deduction is any money subtracted from an employee’s gross paycheck before taxes are withheld. Pretax deductions may pay for the employee’s benefits, including money for retirement plans, life insurance, and health insurance.

Author: Brad Nakase, Attorney

Email | Call (800) 484-4610

Pretax deductions are money subtracted from an employee’s gross earnings to pay for benefits before withholding money for taxes. The most common types of pretax deductions are:

Retirement contribution (401K, Roth)
Vision Benefits
Tax-Deferred Investments
Parking Permits
Medical Expenses
Life Insurance
Health Savings accounts
Flexible Spending Accounts
Dental Plans
Child Care Plans
Disability insurance payment

Pre-tax deductions help reduce workers’ taxable incomes. Employers subtract these deductions from workers’ paychecks before employers withhold additional taxes. For example, employees might pay less federal income tax, or FICA taxes, including Social Security and Medicare.

This article will further detail which deductions qualify as pretax and why pretax deductions are significant for both workers and employers as follows:

1. Are pretax deductions good?

2. What are examples of pretax deductions?

3. Do pre-tax deductions save money?

4. Can pretax deductions reduce taxable income?

5. Do Pretax Deductions Fluctuate?

6. How are pretax deductions calculated?

7. Contact Nakase Wade

Pretax deductions are subtracted from an employee’s gross pay before withholding taxes; therefore pretax deductions lower the employee’s taxable income. That helps workers pay less income tax, FICA, Medicare, and Social Security. Pretax deductions such as retirement savings plans provide workers with a higher net pay amount than if their employer calculated benefits after-tax. Pretax deduction reduce a worker’s overall taxable income, but post-tax benefits can result in tax savings in the future.

Here are examples of pretax deductions:

Health Insurance Plans
Supplementary Insurance Coverage
Tax-Deferred Investments
Commuter Benefits
Parking Permit Payments and Plans
Vision Benefits
Child Care Expenses
Short-Term Disability Insurance
Medical Expenses and Flexible Spending Accounts
Health Savings Plans and Accounts
Dental Plans
Life Insurance Plans
Retirement Plans such as 401(K)s

Pretax deductions lower a worker’s table income. Therefore, the more pretax deductions exist, the less income tax the worker owes. For example, based on pretax deductions, workers might pay less Medicare taxes or a lesser amount of FICA taxes. Employees in California may also pay less in Federal Unemployment Insurance tax and State Unemployment Insurance tax, depending on the amount of their pretax deductions.

Do pre-tax deductions save money?

Pre-tax deductions will save you money because it will almost always reduce taxable income. Using a pretax deduction plan allows employees to get coverages and benefits like medical care and life insurance before gross income is taxed. Pretax deductions from your paycheck reduce your taxable income, which saves you money by reducing the amount of tax you pay.

When workers set up a retirement plan, the process lowers their overall taxable income and allows them to save more money over the long run.

Additionally, when employees pay for their pay before taxes, they pay less for their chosen policies. For example, a worker who purchases their health insurance plan after taxes typically pays less for the same plan if they paid for it before taxes and pretax deductions.

Additionally, workers must pay Medicare taxes and Social Security taxes on some before-tax deductions. This rule means that some employees may pay a higher rate of taxes since the rate is based on a larger gross income.

However, when workers pay taxes on a higher gross income than was seen for income taxes, they benefit because their Social Security benefits and credits increase.

Pretax deductions can reduce the amount of your income before you calculate the tax you owe. Pretax deduction lowers a worker’s tax by reducing their taxable income. When employers subtract money from a worker’s gross pay, not their taxed pay, this lowers the individual’s taxable income. In addition, employers who pay FICA taxes, or SUI or FUTA tax, may also benefit from reduced taxes if money is taken out through pretax deductions.

Do Pretax Deductions Fluctuate?

Pretax deductions fluctuate yearly as the government corrects and regulates them based on estimated living costs and inflation.

When the government regulates pretax deductions, this action sometimes impacts the amount that reduces taxable income as the years pass. However, post-tax deductions do not lower workers’ taxable incomes because the government taxes worker’s incomes before any deductions are taken, such as dues owed to unions or additional plans or benefits.

For example, let’s say that a worker records a gross payment of $1200 per payment period. The worker subtract pretax deduction for 401(k) of $200 per period. Therefore, when the employer subtracts the worker’s withholding amount from their gross pay, the resulting taxable income is $1000. The employer is free to withhold taxes from the worker’s pay. However, employers must remember not to withhold taxes before taking out the correct deduction amounts from the worker’s pay.

Contact Nakase Wade

Understanding all the nuances of pretax deductions can be challenging.

However, all employers and workers in California must understand and stay updated regarding how pretax deductions work.

Contact the California business lawyers and corporate attorneys at Nakase Wade for questions.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment

Most recent blogs:

What Is Fair Chance Hiring? Meaning, Benefits, and How It Works for Employers

Fair chance hiring gives candidates with criminal records fair consideration, helping employers access loyal, diverse, and skilled talent. It strengthens compliance, lowers turnover, and helps build high performance teams without compromising workplace safety.

California Labor Code Section 204: Employee Rights When Employers Pay Late

Late wage payments in California can trigger penalties under Labor Code Section 204, protecting employees from repeated payroll delays. Workers have legal options including waiting time penalties, wage claims, and attorney assistance to secure timely pay.

California Equal Pay Act: Differences from Federal Law, Employer Duties, and Employee Protections

California’s Equal Pay Act expands protections beyond federal law, covering pay disparities by sex, race, and ethnicity. Employers must justify wage differences with valid factors; employees gain retaliation safeguards, filing options, and potential damages.

I-9 Compliance: Employer Rules, Penalties, and Best Practices

I-9 compliance helps employers verify work authorization, meet federal rules, and avoid costly fines, penalties, and legal issues. Use proper documentation, audits, E-Verify, and training to maintain compliance and reduce employment verification risks.

California Labor Code: Divisions, Laws, and Employee Rights Overview

California Labor Code overview covering divisions, employee rights, workplace safety, workers’ compensation, and enforcement across key industries. Trace major milestones, landmark cases, and updates that shape employer obligations and protections for California workers today.

Are Non-Solicitation Agreements Enforceable in California? Exceptions and Legal Insights

Non-solicitation agreements in California are mostly unenforceable, except when tied to trade secrets, business sales, or partnership dissolutions. This article outlines key exceptions, legal challenges, and how courts determine when limited restrictions may stand under state law.

California Labor Code Section 226: Wage Statement Requirements & Penalties

California Labor Code Section 226 sets strict paystub requirements and exposes employers to lawsuits, PAGA penalties, and fees. Review wage statements for all nine items; third party payroll services do not shield companies from compliance mistakes.

Do You Have to Sign a Write-Up at Work? Employee Rights and Employer Policies Explained

Employees often ask if they must sign a workplace write-up, and the answer depends on labor laws and company policies. This guide explains employee rights, employer practices, and options for responding when faced with disciplinary write-ups.

ABC Test California: AB 5 Exceptions, Borello Factors, and Worker Status

AB 5 reshaped California worker classification with the ABC test, Borello factors, and multiple exemptions impacting industries and licensed professionals. This guide covers independent contractor rules, key exceptions, and legal consequences for misclassification under California employment law.

How Long to Keep Employee Files: Record Retention Laws, Timelines, and Best Practices

Keep employee records compliant with federal and state retention laws to protect your business from fines, lawsuits, and compliance issues. Establish clear policies, digitize securely, and retain files for proper timelines to ensure efficiency, privacy, and legal protection.

Separation of Employment: State Notice Requirements, Termination Letters, and Compliance Guide

State separation laws vary, requiring employers to issue termination notices on time to reduce penalties and compliance risk. This guide covers state notice requirements, termination letters, unemployment benefit notifications, and practical steps for multi-state compliance.

Labor Code Section 2810.5: CA Hiring and Wage Notice Guide

California Labor Code Section 2810.5 outlines hiring and wage notice requirements employers must follow to avoid penalties and lawsuits. Employers must provide detailed written notices, comply with minimum wage laws, and use official forms to remain compliant.

California Sick Leave Law 2025: Employee Rights, Accrual Rules, and Local Ordinances

California Sick Leave Law 2025 explains employee rights, accrual rules, and employer duties for paid sick time in California. Local ordinances in Los Angeles, San Francisco, Oakland, Berkeley, and Santa Monica offer additional protections and higher sick leave caps.

What is Comp Time at Work? Definition, Legal Rules, and How it Differs from Overtime

Comp time lets employers offer time off instead of overtime pay, but strict legal rules often limit its use. This guide explains comp time, how it differs from overtime, and the legal risks businesses must review.

California Vacation Law Update 2025: Changes to Paid Leave, PFL Use, and Workplace Policies

California’s 2025 vacation law update adds new protections for employees, impacting paid leave, workplace meetings, and contractor agreements. Employers must adjust to expanded worker rights, anti-discrimination rules, and stricter compliance requirements taking effect January 1, 2025.

California Wage Statement Rules: What Must Be Shown and What to Do If Your Pay Stub Has Errors

California employers must provide accurate pay stubs detailing wages, deductions, hours, and other required information under state labor laws. Employees may seek penalties, back pay, and legal action if wage statements contain errors or missing details.

What Paid Holidays Are Mandatory in California? Employer Requirements, Exemptions, and Federal Worker Pay Rules

California law does not require private employers to provide paid holidays, though many offer them voluntarily for employee satisfaction. Federal employees in California may receive holiday premium pay, depending on eligibility and agency rules.

California Employee Rights: Workplace Discrimination, Wages, and Legal Protections

California employees have rights covering discrimination, wages, and workplace safety under state and federal laws. This guide outlines protections against unfair treatment, retaliation, and wage violations.

SB 616: Key Changes to California Paid Sick Leave Law Every Employer Should Know

California’s SB 616 increases paid sick leave from 24 to 40 hours, requiring policy updates for statewide employer compliance. Employers must adjust accrual, carryover, and usage rules, update handbooks, train staff, and ensure payroll accuracy.

Onboarding Paperwork Checklist: 10 Key Documents Every Employer Needs for New Hires

Onboarding paperwork supports compliance, payroll accuracy, and smooth integration for new hires with important legal, tax, and organizational documents. This checklist outlines 10 vital records employers should provide to support efficiency, clarity, and a positive start for every employee.

Resentment Examples at Work 6 Ways Workplace Tension Takes Hold

Resentment Examples at Work: 5 Ways Workplace Tension Takes Hold

Workplace resentment can silently erode trust, collaboration, and morale, leading to lasting cultural damage if left unchecked. Recognizing resentment examples helps address unresolved conflict, burnout, and broken promises before they harm productivity and team relationships.

How Many Hours Can You Work at 15? State-by-State Guide to Teen Work Limits in the U.S.

Teen work laws set limits on hours for 14- and 15-year-olds, varying by state and job type. Find out work restrictions, permitted jobs, and tips for landing your first position at 14 or 15 in the U.S.

CA Exempt Salary 2025: Minimum Wage and Exemption Updates for California Employers

California's 2025 exempt salary threshold increases to $68,640 annually, with minimum wage rising to $16.50 statewide. New laws also impact sick leave, union exemptions, captive audience meetings, and driver’s license requirements for job postings.

How Long to Keep Payroll Records in California: Employer Rules for 2025

Employers in California must retain payroll and personnel records for up to four years to remain compliant with 2025 regulations. Digital and physical storage methods, I-9 rules, and supervisor training responsibilities are also covered in the updated requirements.

California Fair Chance Act: Updates Employers Need to Know About Criminal History Rules

Employers in California must follow stricter rules on criminal history checks under the updated Fair Chance Act from October 2023. New regulations expand definitions, require tailored evaluations, and mandate written notices before rejecting candidates due to conviction records.

Breaks in California: Detailed Guide to Rest and Meal Break Rules for Employers

California employers must follow detailed rules for rest and meal breaks, including timing, written waivers, and compensation requirements. Improper or missed breaks can result in legal action, wage penalties, and issues related to industry-specific labor standards.