Which of the following best describes pre-tax deductions and contributions in payroll accounting?

• A. Mandatory taxes withheld from an employee's paycheck, such as federal income tax and Social Security tax.
• B. Employer-paid benefits that do not affect the employee's taxable income.
• C. Amounts added to an employee's net pay after taxes are withheld, such as bonuses and commissions.
• D. Amounts subtracted from an employee's gross pay before taxes are calculated, such as retirement plan contributions and health insurance premiums.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of pre-tax deductions and contributions. These are amounts subtracted from an employee's gross pay before taxes are calculated. Examples include retirement plan contributions (e.g., 401(k)) and health insurance premiums.
2. Step 2: Differentiate pre-tax deductions from other payroll components. For instance, mandatory taxes like federal income tax and Social Security tax are withheld after pre-tax deductions are applied, not before.
3. Step 3: Recognize that employer-paid benefits, such as employer contributions to health insurance, do not directly affect the employee's taxable income and are not considered pre-tax deductions.
4. Step 4: Understand that amounts added to an employee's net pay, such as bonuses and commissions, are not pre-tax deductions. These are additional earnings subject to taxation.
5. Step 5: Conclude that pre-tax deductions reduce the employee's taxable income, which can lower the amount of taxes owed. This aligns with the correct answer: 'Amounts subtracted from an employee's gross pay before taxes are calculated, such as retirement plan contributions and health insurance premiums.'