Chapter 2 Understanding Your Paycheck
72
• unemployment insurance
• paid time off / vacation time
• retirement plan
Benefi ts off ered by employers can vary widely. Small companies may off er
little or no employee benefi ts. Larger companies may off er standard benefi ts, or
they may off er many less common benefi ts. For example, in addition to insurance
and time off , some companies off er employees dining facilities, gyms, on-site
doctors, dry cleaning, and more.
Pre-Tax Deductions
Some benefi ts are paid for by the employer. Other benefi ts are off ered as an
option by the employer but must be paid for by the employee. These are pre-tax
deductions. Pre-tax deductions are payments employees make for the cost of
benefi ts. For example, an employer may negotiate a dental insurance plan for
its employees. However, should the employee wish to have dental insurance,
the employee authorizes that money be withheld from his or her check to pay
for that insurance. Other employers may choose to pay for employee dental
insurance, in which case no money would be withheld for dental coverage.
Sometimes, the employer and employee share the cost of insurance.
Often, an employee has the option to add dependents, such as a spouse
or children, to certain benefi t plans. For example, it is common for an employee
to add dependents to a health, vision, or dental insurance plan. With most
employers, the cost of adding dependents is at least partially paid by the
employee. The cost of adding those dependents is withheld from the employee’s
paycheck and used to pay the insurance premiums for the dependents.
As you learned earlier in this chapter, taxes are withheld from earnings
when you receive your paycheck. Some deductions from pay occur before
taxes are calculated and others are deducted after taxes are calculated. So
what diff erence does that make? Well, if the money is withheld before taxes are
calculated, then that money is not taxed. In other words, an employee’s taxable
income is reduced by the amount withheld before taxes. For example, assume an
employee is paying $400 per month to add his or her children to an employer’s
health insurance plan. That adds up to $4,800 annually. If that money is deducted
before taxes, the employee is likely to have to pay less in taxes. To calculate the
tax savings, use the following formula:
tax savings = premium × tax rate
fyi
Insurance is a product
that provides fi nancial
protection against a
specifi c loss. In exchange
for protection, the
insurance company is paid
a premium. A premium
is the customer’s cost for
this protection.
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Chapter 2 Understanding Your Paycheck
72
• unemployment insurance
• paid time off / vacation time
• retirement plan
Benefi ts off ered by employers can vary widely. Small companies may off er
little or no employee benefi ts. Larger companies may off er standard benefi ts, or
they may off er many less common benefi ts. For example, in addition to insurance
and time off , some companies off er employees dining facilities, gyms, on-site
doctors, dry cleaning, and more.
Pre-Tax Deductions
Some benefi ts are paid for by the employer. Other benefi ts are off ered as an
option by the employer but must be paid for by the employee. These are pre-tax
deductions. Pre-tax deductions are payments employees make for the cost of
benefi ts. For example, an employer may negotiate a dental insurance plan for
its employees. However, should the employee wish to have dental insurance,
the employee authorizes that money be withheld from his or her check to pay
for that insurance. Other employers may choose to pay for employee dental
insurance, in which case no money would be withheld for dental coverage.
Sometimes, the employer and employee share the cost of insurance.
Often, an employee has the option to add dependents, such as a spouse
or children, to certain benefi t plans. For example, it is common for an employee
to add dependents to a health, vision, or dental insurance plan. With most
employers, the cost of adding dependents is at least partially paid by the
employee. The cost of adding those dependents is withheld from the employee’s
paycheck and used to pay the insurance premiums for the dependents.
As you learned earlier in this chapter, taxes are withheld from earnings
when you receive your paycheck. Some deductions from pay occur before
taxes are calculated and others are deducted after taxes are calculated. So
what diff erence does that make? Well, if the money is withheld before taxes are
calculated, then that money is not taxed. In other words, an employee’s taxable
income is reduced by the amount withheld before taxes. For example, assume an
employee is paying $400 per month to add his or her children to an employer’s
health insurance plan. That adds up to $4,800 annually. If that money is deducted
before taxes, the employee is likely to have to pay less in taxes. To calculate the
tax savings, use the following formula:
tax savings = premium × tax rate
fyi
Insurance is a product
that provides fi nancial
protection against a
specifi c loss. In exchange
for protection, the
insurance company is paid
a premium. A premium
is the customer’s cost for
this protection.

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