BEFORE TAX DEDUCTION
Before-Tax Deduction
Before-tax deduction refers to the amount subtracted from an employees gross salary by the employer before any taxes are withheld. These deductions are made prior to the calculation of income tax, thereby reducing the employees taxable income. Before-tax deductions are established to provide various benefits to employees, allowing them to allocate a portion of their earnings for specific purposes before taxation is applied.
The primary advantage of before-tax deductions is that they are subtracted from the gross salary before income taxes are calculated. This results in a reduction of the employees taxable income. Before-tax deductions often fund employee benefit programs, such as medical and life insurance. By allocating funds for these benefits before taxation, employees can maximize their coverage without impacting their net income significantly.