Pre-tax deduction happens before the taxes are calculated and deducted from the gross income. Here the taxable income would be less as the deduction happens before the tax gets calculated.
Post-tax deduction happens after the taxes are calculated and deducted from the gross income. Here the taxable income would be more as the deduction happens only after the taxes are deducted.
Example: Gross income - $ 1000, 401(K) savings - $200, tax percentage – 2%
In case of Pre-tax Deduction, Net Earnings will be $ 784
Calculation: (Gross income - Pretax deduction) – tax deduction
= (1000-200) - 16
= 784
In this example, the pretax deduction (401 K Savings) is deducted before the tax is calculated on the gross income. The net gross available would be $ 800 after deducting $200 for 401 K savings. 2 % tax on $800 would be $16. So the net earnings will be $ 784 after deduction of tax.
In case of Post –tax Deduction, Net Earnings will be $ 780
Calculation: (Gross income – tax deduction) – Post tax deduction
= (1000 – 20) -200
= 780
In this example, the post tax deduction (401 K savings) is deducted after the tax is reduced from the gross income. 2% tax on gross income would be $20. After deduction of tax the net gross available is $ 980. Then after deducting the amount of $200 for 401k which is post tax deduction, the net earnings available will be $780.
No comments:
Post a Comment