On this page
A payroll deduction is an expense tied to one earned income. It comes out of that pay, only in the months that pay is received. Its payroll tax treatment sets which wages it lowers: pre-tax lowers the wages subject to federal, state and local income tax, and after-tax lowers none. You can change each of those, and Social Security and Medicare wages, separately.
Retirement and HSA contributions taken from pay are set up as payroll rules instead. Among those rules, only an HSA contribution made through a cafeteria plan lowers payroll-tax wages.
- Open ExpensesAdd expense and enter the amount. The form starts with a monthly amount.
- Open Advanced: growth, funding and timing and check Payroll Deduction.
- Under Deduct from income, choose the income it comes out of. Only earned income is listed.
- Choose Pre-tax or After-tax under Payroll tax treatment.
- Optionally, change the boxes under Reduces taxable wages for. They start at the treatment’s defaults.
A payroll deduction can’t also be funded from a specific account. It grows like any other expense: with plan inflation by default, or at a custom or fixed rate, compounding from the plan’s start year. Flexible spending rules never cut it. See Recurring and one-time expenses for the growth options.
| Deduction | Income-taxable wages | Social Security and Medicare wages | Take-home pay |
|---|---|---|---|
| Payroll deduction, Pre-tax | Lower | Unchanged | Lower |
| Payroll deduction, Pre-tax with Social Security and Medicare checked | Lower | Lower | Lower |
| Payroll deduction, After-tax | Unchanged | Unchanged | Lower |
| Traditional 401(k) contribution | Lower | Unchanged | Lower |
| Roth 401(k) contribution | Unchanged | Unchanged | Lower |
| HSA contribution, section 125 salary reduction | Lower | Lower | Lower |
| HSA contribution, direct or funding unknown | Lower | Unchanged | Lower |
Contributions come from payroll rules in Income allocation. How HSA money is funded is set per HSA period in Plan details.
The pre-tax reduction lowers adjusted gross income. It therefore lowers federal and state income tax, and every threshold that uses AGI or MAGI, such as the taxable share of Social Security, premium tax credits and IRMAA. Local taxes that start from taxable wages use the lower amount too.
The four boxes under Reduces taxable wages for are federal income tax, state income tax, local income tax, and Social Security and Medicare. Only boxes that differ from the treatment’s defaults are saved, so an expense you never change keeps following its treatment.
| Deduction | Boxes to check |
|---|---|
| Health, dental or vision premium through a section 125 cafeteria plan | All four |
| Retirement deferral entered as an expense (401(k)-style) | Federal, state and local; not Social Security and Medicare |
| Pennsylvania resident’s retirement deferral | Federal only: Pennsylvania and its local earned income taxes include deferrals |
| New Jersey resident’s 403(b) or 457 deferral | Uncheck state: New Jersey excludes only 401(k) deferrals |
| Union dues, after-tax insurance, charitable payroll giving | None (After-tax) |
Retirement contributions entered as payroll rules already follow these state rules; the elections apply to payroll deduction expenses.
Unchecking Federal income tax while keeping State income tax checked subtracts the amount from the state base only, and the reverse adds it back to the state base. Lower Social Security and Medicare wages lower the payroll tax and any local tax measured on Medicare wages.
A single filer earns $100,000 in 2026 and has $6,000 a year of health premiums deducted from pay. Nothing else is entered.
Pre-tax
| Wages | $100,000 | |
|---|---|---|
| − | Pre-tax deduction | $6,000 |
| − | Standard deduction | $16,100 |
| = | Taxable income | $77,900 |
| → | Income tax | $11,850 |
After-tax
| Wages | $100,000 | |
|---|---|---|
| − | After-tax deductionnot subtracted | $0 |
| − | Standard deduction | $16,100 |
| = | Taxable income | $83,900 |
| → | Income tax | $13,170 |
Pre-tax treatment saves $1,320: the $6,000 comes off the top of the 22 percent bracket. Social Security and Medicare tax is $7,650 either way, and pay after the deduction is $94,000 either way.
A deduction applies only in the months its income is paid. If it has its own milestones, it applies only in the months when both the deduction and the income are active. When a job ends mid-year, its deductions end with it. When the income stops for good, the deduction stops too; it doesn’t become an ordinary expense paid from savings.
| Deduction entered, today’s dollars | $6,000 | |
|---|---|---|
| × | Inflation factor for 2031five years at 3% | 1.1593 |
| × | Months the salary is paid ÷ 12 | 0.50 |
| = | Deduction in 2031 | $3,477.82 |
The salary in this example ends at a retirement milestone reached in July 2031, as in the example in Wages, raises and work income.
For how a salary’s months are set, see when pay starts and stops.
Payroll deductions count in the year’s expenses. The year’s cash flow shows each one leaving gross income before after-tax cash, as workplace deferrals do. See Trace a year of money in and out.