Pretax

Pretax denotes amounts that are calculated or contributed before taxes are applied. The term describes income earned before tax as well as deductions or contributions that reduce the portion of income subject to tax. In payroll and benefits contexts, pretax often refers to money withheld from pay before tax calculation.

In compensation planning, pretax deductions lower current-year taxable income, potentially reducing federal and some state income taxes. They generally do not reduce payroll taxes such as Social Security and Medicare, and their availability depends on the plan design and applicable law.

Common pretax examples include traditional 401(k) contributions, deductible traditional IRA contributions, premiums for employer-sponsored health insurance, and other payroll deductions such as Flexible Spending Accounts and Health Savings Accounts when funded through payroll.

Post-tax and after-tax contributions, by contrast, are taxed when earned but may offer tax-free withdrawals later. Examples include Roth 401(k) or Roth IRA contributions. The choice between pretax and post-tax contributions affects take-home pay, retirement savings, and taxable income in retirement.

In tax planning, pretax can reduce adjusted gross income and influence tax brackets and eligibility for credits. Rules vary by country and jurisdiction, and not all benefits are available to every worker. It is prudent to consult tax guidance to understand pretax options within a given system.