Pre-tax payroll deductions
When you make out the payroll checks, there are some deductions that the employee gets before you take out taxes. You may be required to tax the employee first and then deduct the amount.
You need to do the deductions properly in order to calculate employee withholding taxes and the employer's share of taxes properly. Avoid Internal Revenue Service problems with pre-tax payroll deductions.
Before you calculate taxes, look for specific payroll deductions that you need to remove from the employee paycheck.
These include items from section 125 of the IRS tax code and qualified deferred compensation plans, such as the 401k. Section 125 of the tax code also covers cafeteria plans, which are flexible spending accounts.
The allowable items under section 125 include the cost of qualifying insurance programs. These are medical insurance, dental plans, eye refractory and medical flexible spending accounts. Be aware that the employee with a cohabiter who isn't a legal dependent needs different treatment. The employee's portion can be deducted pretax, but the portion for the cohabiter or non-qualifying dependent is taken on an after-tax basis.
Note that there's a difference between a flexible spending account and a health savings account.
If the employee fails to use the money in the flexible spending account by the end of the year, the employee loses it. Only employees who have a high deductible health insurance plan qualify for an HSA. The withholding is available for pretax treatment, but the amount in the plan belongs to the employee without any "use it or lose it" stipulation.
Include items in the deduction like prepaid parking and flexible spending accounts.
Prepaid parking done by way of payroll deduction is one pretax deduction. The regulations require that parking deductions need to be made in advance to get the pretax status and also that no portions made as a pretax payment are refundable.
There are both pre-tax and post-tax amounts that are allowed as contributions to a 401k. In 2009, the allowable amount was £10,725, with an additional £3,575 as a catch-up for those over the age of 50. Don't count the employer matching contribution into these limits. Post-tax 401k contributions really aren't part of the plan, but an easy way for the employees to save additional money.
These are always post-tax deductions. For smaller companies, simple IRAs, solo and simple 401ks are also pretax. If you work for an institution that qualifies, then the 403b deductions are pretax.
Cafeteria 125 accounts allow the employee to use the flexible spending account for other items besides the payment of health insurance. The money in the flexible spending account is pretax.
Alert employees that this money is available for not just insurance premiums, but also day care, prescription drugs, and other items. If you notice an employee has a large amount of money in the account near the end of the year, alert him or her to all the uses for the funds.