Before-tax deductions are subtracted from the employee’s gross pay before taxes are withheld. After-tax deductions are subtracted from the employee’s net pay after taxes are withheld. Also known as payroll tax, FICA refers to Social Security https://www.bookstime.com/articles/after-tax-income tax and Medicare tax. Whether a person is an employee or an independent contractor, a certain percentage of gross income will go towards FICA. In the case of employees, they pay half of it, and their employer pays the other half.

Gross pay is the total amount of income you receive as wages before any taxes or other deductions are withheld by your employer. Deductions may include things like federal and state income tax withholding, employee benefit premiums like dental and health insurance, or 401(k) retirement account contributions. A flexible spending account (FSA) is a tax-advantaged account that is usually offered by employers to their employees so they have the ability to set aside some of their earnings. Because contributions into an FSA are deducted from paychecks during payroll before income taxes, less income will be subject to taxation. The most common FSAs used are health savings accounts or health reimbursement accounts, but other types of FSAs exist for qualified expenses related to dependent care or adoption. From 2021, the ‘super-gross income’ concept has been cancelled, and the tax base is not calculated from gross income only.

How to calculate net income

After-tax income is the difference between gross income and the income tax due. This will depend on how you’re paid and whether you receive an annual salary or hourly pay. A salaried employee will be paid a fixed amount, usually divided over 12 months. If you’re being paid by the hour—also sometimes known as a wage employee—your payment will vary depending on the number of hours you work. The main difference between pre-tax deductions and after-tax deductions is when the deductions are withheld from a paycheck.

The maximum deduction you can claim is $2,500 this year – but it’s limited by your income. So, if your filing status is Single, Head of Household, or Qualified Widower, and your modified AGI is more than $90,000 in 2023, you don’t qualify. If you’re Married Filing Jointly and make more than $185,000 in 2023, you also can’t use this deduction to lower your AGI. Prior to the 2014 guidance, each distribution from a participant’s account contained a pro rata share of both the pretax and after-tax amounts. For example, if a participant’s account was 80% pretax, then each distribution or rollover was made up of 80% pretax and 20% after-tax.

Information found on a paycheck:

Therefore, the after-tax income is simply one’s gross income minus taxes. For individuals and corporations, the after-tax income deducts all taxes, which include federal, provincial, state, and withholding taxes. After deducting all applicable taxes, the after-tax income represents the total disposable income available to spend.