Pre and Post Tax Retirement Contributions
When calculating your effective tax rate, the types and amounts of your monthly (or bi-monthly) deductions need to be factored in. Some deductions are made pre-tax, and some are made post-tax.
CalPERS contributions, for example, are made pre-tax. This means that before calculating how much you ultimately have to pay in Federal and California State taxes, your retirement contributions are subtracted first. Retirement contributions are subtracted from the income you pay taxes on, as far as the IRS in concerned. This is beneficial in lowering the total amount of income taxes you pay each year.
If you had a monthly salary of $4,200 and a $300 CalPERS contribution, the adjusted salary used to determine how much you have pay in Federal and State taxes is $3,900 ($4,200-$300). If, in addition to your $300 per month CalPERS contribution, you contributed $100 each month to a 401(k), your taxable income would be $3,800 ($4,200-$300-$100).
The California Job Blog has an article on the Savings Plus 401(k) and 457(b) Plans.
When you receive a distribution from CalPERS or another tax-deferred account in retirement, it is treated as income and taxed accordingly. For most people, income in retirement is significantly less than during their working years. Income that is saved in a qualified, tax-deferred account during one’s working years and distributed in retirement can result in lower total taxes paid.
Tax Treatment of Other Deductions
Medical, Dental and FlexElect contributions are considered pre-tax, which means they are subtracted before calculating how much you owe in Federal and California State income taxes. In addition to being pre-tax (Federal and State) when calculating income taxes, medical, dental and FlexElect contributions are subtracted before calculating how much Social Security and Medicare tax is withheld from your paycheck.
If you've ever looked at your W-2 been curious about what Social Security and Medicare wages are and how they're calculated, it is your total income minus the amount you contribute towards things like health and dental insurance premiums. This means that you're not paying social security and medicare taxes on the portion of you income that ultimately goes towards health insurance.
Retirement contributions reduce Federal and State taxes, but they do not reduce withholding for Social Security, Medicare and CA SDI.
Deductions for Union Dues, Group Legal Services and Life Insurance are all post-tax, which means they won’t reduce your taxable income.
Taxes Vs. Withholding:
Each pay period, state employees receive a pay check. The amount of this check is your gross pay minus deductions. Among these deductions (which also include, retirement, health insurance, union dues, etc.) are Federal Tax and State Tax. But you aren’t technically paying Federal and State taxes each month. Taxes are only paid once a year, when you submit your IRS and state tax returns.
The amount withheld each month is an estimate based on how much your employer projects you'll earn in a given year. Sometimes they can withhold too little, and you'll end up having a tax bill when you file your taxes. If they withhold too much, you'll get a refund.
For money earned in 2021, you will file your taxes by April 18, 2022. By this date you will have normally filed your taxes with the IRS and the California Franchise Tax Board. The amount you pay or get back at this time is the difference between how much in taxes you should have paid, versus the total amount was withheld.
2022 Tax Withholding Amounts
Federal Income Tax: Depends on total taxable income and filing status. Click here for the 2022 tax brackets.
CA State Income Tax: Depends on total taxable income and filing status. Click here for 2022 tax brackets.
California State Disability Insurance (CASDI): 1.2%
Social Security: 6.2% (Employer pays an additional 6.2% for a total of 12.4%)
Medicare: 1.45% (Employer pays an additional 1.45% for a total of 2.9%)
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