What are pretax salary reductions?

Discussion Prompt(s)Prompt 1

What are pretax salary reductions? Many of you are familiar with the term of cafeteria plans, where employees can choose between cash pay and or qualified nontaxable benefits. You might also have heard about Flexible Spending Account, where the employee puts pretax dollars into a trust account to be used for health care, certain insurance premiums and dependent care. How will these items affect your withheld income tax and tax expense paid by employers? For those of you who have not considered the pretax salary reductions, might you consider it for the future tax year? Why or why not?

Prompt 2

What are the methods to compute the amount of income tax to be withheld? Although many businesses use ADP or other outside sources to perform payroll functions, it’s still very important for the payroll accountant (even employees) to fully understand how to compute the amount of income tax to be withheld. Do you still remember filling out Form W-4 on the first days of your current job? There is one place where you enter the number of withholding allowances… how will that affect the withheld amount for FIT?  Generally speaking there are two methods to be used – wage bracket method and percentage method. What’s your understanding on each of these methods and examples would be great.

 

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