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Qualified Pre-Tax Deduction
Qualified pre-tax deduction is a deduction that is taken from the pay of an employee before the tax is calculated. A qualified pre-tax deduction can reduce an employee’s liability for federal or state taxes as well as FICA taxes. Qualified pre-tax deduction is not reported on the 941 quarterly report or the W-2. |
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Qualified pre-tax deduction happens from the gross wages and there are many types of pre-tax deductions and each one of them has their own tax implications. Some pre-tax deduction reduces the gross wages so that the taxable income reduces and this results in the reduction of federal income tax. Other pre-tax deductions end up reducing the social security and medicare (FICA) taxes.
You can get a qualified pre-tax deduction through transit or vanpool benefits provided by your employer. The federal law allows an employer to provide three types of benefits. These are employer paid, employee-paid pre-tax deduction and a combination of both.
In an employer paid benefit, the employee receives up to $100 a month tax free to commute using vanpools or transit. The employee does not pay any taxes on this benefit.
In employee pre-tax deduction, the employee ends up saving on income tax and the amount of the benefit is not treated as taxable salary.
A combination of employer paid and employee pre-tax deduction means that the employee does not have to pay any taxes on the benefit provided by the employer. In addition, the employee ends up saving taxes as he opts for a pre-tax deduction so that he can pay the balance of the commuting costs on his own.
Qualified pre-tax deductions are also offered by some 401k plans where the deductions are made before the taxes and this ends up lowering a person’s tax liability.
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