The Power of Pre-Tax Deductions

Shareholder Basis & Company Brokerage Accounts
December 6, 2020
ROUND 2: PPP & EIDL Loans
December 22, 2020

The Power of Pre-Tax Deductions

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Group plans are great!  They’re less expensive for the exact same thing.  Oh wait… there’s more! Employees can pay for their share of the monthly premium via pre-tax, “above the line”, deductions.  So the health / benefits premiums are paid out of GROSS wages… BEFORE federal, state, local, Social Security, Medicare, and any other applicable taxes are calculated & withheld!

So let’s say you pay for individual health insurance through the “exchange” and pay $500 a month for it.  It comes from your bank account and that’s that…Here’s how it works with a group plan.

PAYING FOR INDIVIDUAL INSURANCE

Normal Paycheck = $2000

Taxes (let’s say 30% total) = $2000*30% = $600

Net Pay = $1400

Minus previous health insurance cost of $500 = $900 left for you.

PAYING FOR GROUP INSURANCE

Normal Paycheck = $2000

Minus cost of the group plan = $2000 – $400 = $1600

Taxes (let’s say 30% total) = $1600*30% = $480

Net Pay = $1120!  That’s $220 more than before!

So even though the insurance was $100 less… because you also paid for the insurance via pre-tax benefit, that led to an additional $120 in your pocket.