Question

In: Accounting

Summarize pretax salary reductions. Discuss how these items affect your withheld income tax and tax expense...

Summarize pretax salary reductions.

Discuss how these items affect your withheld income tax and tax expense paid by employers.

If you have not considered the pretax salary reductions, would you consider it for the future tax year? Explain why or why not.

If you use pretax salary reductions, how have they worked out for you, will you use them again next year? Justify your reasons.

Solutions

Expert Solution

Payroll can involve a lot of deductions. You have to withhold taxes and money for employee benefits.

When it comes to benefits, there are two types of deductions, pre-tax and post-tax deductions.

What is a pre-tax deduction?

A pre-tax deduction is money you remove from an employee’s wages before you withhold money for taxes. Pre-tax deductions are used to pay employee premiums of certain benefits. Not all benefits can be pre-tax deductions.

Pre-tax deductions reduce an employee’s taxable wages, meaning they will likely owe less federal income tax and FICA tax (Social Security and Medicare taxes). If your business is in an area with state or local taxes, pre-tax deductions might also reduce an employee’s liability for these taxes. Pre-tax deductions often give employees more spending money.

Pre-tax payroll deductions also lower federal unemployment tax (FUTA tax), which only employers pay.

Even though there is no tax now, employees might owe taxes on pre-tax benefits later. For example, an employee has a pre-tax retirement account. You withhold the money before taxes and deposit it into the account. When the employee retires and uses the saved funds, they will owe taxes on the amount.

Not all pre-tax deductions are completely tax free. Some deductions are exempt from federal income tax, but not exempt from FICA and FUTA taxes. For example, adoption assistance is exempt from federal income tax, but not FICA and FUTA. Also, some benefit deductions are only pre-tax up to a certain amount. For example, educational assistance up to $5,250 per year is exempt from taxes. Anything beyond that amount is subject to taxes.

Pre-tax deduction example

Let’s pretend you have an employee who has a pre-tax deduction for a flexible spending account (FSA). The deduction is $50 per payroll, and you pay the employee a gross pay of $1,000 per biweekly pay period.

You first need to subtract the $50 pre-tax withholding.

$1,000 – $50 = $950

The employee’s taxable income is $950 for the pay period. You can now withhold taxes.

What deductions are pre-tax?

Many fringe benefits might allow pre-tax deductions.

For information about the taxation of fringe benefits, check out Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Make sure you also check your written plan documentation because each benefit has different rules.

Pre-tax deductions list

Below is a pre-tax deductions list of common employee benefits.

Health benefits

You might be able to withhold health benefits before taxes, especially if the health benefits are part of a Section 125 cafeteria plan.

Common pre-tax health benefits include health insurance, accident insurance, dental and vision insurance, flexible spending accounts, and health savings accounts (HSA).

For the most part, health benefits are pre-tax. Some health benefits have contribution limits or special tax withholding rules.

Life insurance

Group-term life insurance is exempt from all employment taxes. However, it is only exempt from FICA taxes up to the cost of $50,000 of coverage.

Retirement accounts

Some retirement plans are eligible for pre-tax deductions, such as a SIMPLE IRA or some types of 401(k). Pre-tax retirement accounts are typically exempt from all employment taxes.

Transportation programs

Transportation benefits can help employees pay for public transportation and parking fees, among other things. Depending on the types of transportation benefits you offer, there might be limits. Once the benefit reaches that limit, it is no longer exempt from taxes.


Related Solutions

Federal Withholding Taxes versus Estimated Tax Payments 1. Summarize the difference between federal income tax withheld...
Federal Withholding Taxes versus Estimated Tax Payments 1. Summarize the difference between federal income tax withheld and federal estimated tax payments. 2. Summarize the general rule for federal estimated tax payments. You may use the following sources to research the answers: (1) learning objectives 9.1 and 9.2 of your text book, or IRS Publication 505 “Tax Withholding and Estimated Tax” for use in 2017 at https://www.irs.gov/pub
How do I find income tax expense
How do I find income tax expense
Define AAR: Then discuss how each of the following items can affect your assessment of AAR...
Define AAR: Then discuss how each of the following items can affect your assessment of AAR -Be specific Third Party Use of Financials Possibility of Financial difficulties Management Integrity What was your assessment of AAR and which of these was the most important for your assessment. AAR = Acceptable Audit Risk
2) Define AAR: Then discuss how each of the following items can affect your assessment of...
2) Define AAR: Then discuss how each of the following items can affect your assessment of AAR -Be specific a. Third Party Use of Financials b. Possibility of Financial difficulties c. Management Integrity d. What was your assessment of AAR and which of these was the most important for your assessment. AAR- acceptable audit risk
Jeremy earned $101,600 in salary and $7,600 in interest income during the year. Jeremy’s employer withheld...
Jeremy earned $101,600 in salary and $7,600 in interest income during the year. Jeremy’s employer withheld $11,000 of federal income taxes from Jeremy’s paychecks during the year. Jeremy has one qualifying dependent child who lives with him. Jeremy qualifies to file as head of household and has $30,200 in itemized deductions. (Use the tax rate schedules for 2020) a. Determine Jeremy’s tax refund or taxes due. Description Amount (1) Gross income = (2) For AGI deductions = (3) Adjusted gross...
Jeremy earned $100,200 in salary and $6,200 in interest income during the year. Jeremy’s employer withheld...
Jeremy earned $100,200 in salary and $6,200 in interest income during the year. Jeremy’s employer withheld $11,000 of federal income taxes from Jeremy’s paychecks during the year. Jeremy has one qualifying dependent child who lives with him. Jeremy qualifies to file as head of household and has $23,200 in itemized deductions. A. Determine Jeremy’s tax refund or taxes due. (1) Gross income $106,400 (2) For AGI deductions 0 (3) Adjusted gross income $106,400 (4) Standard deduction 18,350 (5) Itemized deductions...
eremy earned $100,700 in salary and $6,700 in interest income during the year. Jeremy’s employer withheld...
eremy earned $100,700 in salary and $6,700 in interest income during the year. Jeremy’s employer withheld $11,000 of federal income taxes from Jeremy’s paychecks during the year. Jeremy has one qualifying dependent child who lives with him. Jeremy qualifies to file as head of household and has $25,700 in itemized deductions. (Use the tax rate schedules.) Problem 4-29 Part-a (Algo) a. Determine Jeremy’s tax refund or taxes due. b. Assume that in addition to the original facts, Jeremy has a...
Joe earned $100,000 in salary and $6,000 in interest income during the year. Joe’s employer withheld...
Joe earned $100,000 in salary and $6,000 in interest income during the year. Joe’s employer withheld $11,000 of federal income taxes from Joe’s paychecks during the year. Joe has one qualifying dependent child who lives with him. Joe qualifies to file as head of household and has $23,000 in itemized deductions. Assume that in addition to the original facts ($106,000 of ordinary gross income), Joe sold Amazon shares that he bought for $6,000 on 1/1/18 for $10,000 on 12/31/19. You...
Jeremy earned $100,900 in salary and $6,900 in interest income during the year. Jeremy’s employer withheld...
Jeremy earned $100,900 in salary and $6,900 in interest income during the year. Jeremy’s employer withheld $11,200 of federal income taxes from Jeremy’s paychecks during the year. Jeremy has one qualifying dependent child who lives with him. Jeremy qualifies to file as head of household and has $26,700 in itemized deductions. (Use the tax rate schedules.) a. Determine Jeremy’s tax refund or taxes due. b. Assume that in addition to the original facts, Jeremy has a long-term capital gain of...
Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy’s employer withheld...
Jeremy earned $100,000 in salary and $6,000 in interest income during the year. Jeremy’s employer withheld $11,200 of federal income taxes from Jeremy’s paychecks during the year. Jeremy has one qualifying dependent child who lives with him. Jeremy qualifies to file as head of household and has $23,000 in itemized Deductions. a) Determine Jeremy’s tax refund or taxes due. b) Assume that in addition to the original facts, Jeremy has a long-term capital    gain of $4,000. What is Jeremy’s...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT