• Pre-tax deduction happens before the taxes are calculated and deducted from the gross income. Here the taxable income would be less as the deduction happens before the tax gets calculated.
• Post-tax deduction happens after the taxes are calculated and deducted from the gross income. Here the taxable income would be more as the deduction happens only after the taxes are deducted.

 Example: Gross income – $ 1000, 401(K) savings – $200, tax percentage – 2%

 In case of Pre-tax Deduction, Net Earnings will be $ 784

              Calculation: (Gross income – Pretax deduction) – tax deduction

      = (1000-200) – 16     

      = 784

In this example, the pretax deduction (401 K Savings) is deducted before the tax is calculated on the gross income. The net gross available would be $ 800 after deducting $200 for 401 K savings. 2 % tax on $800 would be $16. So the net earnings will be $ 784 after deduction of tax.

In case of Post –tax Deduction, Net Earnings will be $ 780    

Calculation: (Gross income – tax deduction) – Post tax deduction

                      = (1000 – 20) -200

                      = 780

In this example, the post tax deduction (401 K savings) is deducted after the tax is reduced from the gross income. 2% tax on gross income would be $20. After deduction of tax the net gross available is $ 980. Then after deducting the amount of $200 for 401k which is post tax deduction, the net earnings available will be $780.

For all the tax related information, there are 3 main tables which need to be looked at:

T5UTE (Tax Authority / Tax Calculation Model):  The tax model will be assigned to the tax authorities.

T5UTM (Tax Model): Taxability model will be defined here with respect to definition of type of payment, type of employee and residency or work. Tax combo for each definition will be assigned.

T5UTY (Tax Type Combinations): Here we define the Tax Type combination. Against each tax combo tax type will be defined.

The tax combo defined will be assigned to taxability model and the taxability model will be assigned to tax authority.

Steps to be followed to stop the deduction of a particular tax which is being withheld from the employees who work for a particular region:

Ø Check for the taxability model assigned to the tax authority (in table T5UTE)

Ø Then check for the tax combo attached to the tax model. (in table T5UTM).

Ø Check if any of the tax combo’s are assigned with the tax type that calculates the tax which needs to be stopped from deduction from employees. (in table T5UTY)

ØIf so, create a new tax combo ignoring the relevant tax type that calculates tax which needs to be stopped from deduction.

ØAssign the newly created tax combo to the taxability model with the effective date by delimiting the earlier tax combo.

*Note: These steps can be followed only when the tax model and the tax combo are used only for that particular region for which the tax deduction from the employees needs to be stopped.

SAP uses the BSI tax engine to calculate U.S. taxes. The BSI tax engine covers four types of payments:

• Regular payments
• Supplemental payments
• Cumulative payments
• Vacation payments

The regular payment methods are:

• Regular
• Maximum wage
• Self adjust
• Year-to-date

BSI determines the appropriate regular payment method and assigns it to each tax. This pre-assigned method is used in the calculation when the type of payment indicated via the Payment Type parameter is Regular Payments.

The supplemental payment methods are:

• Regular payment
• Flat rate
• Separate aggregation
• Rate table
• Cumulative
• Aggregation with pay periods
• Wage-associated
• Concurrent
• Regular no exemption
• System selected

The cumulative payment methods are:

• Regular payment
• Cumulative

The vacation payment methods are:

• Regular payment
• Vacation

BSI supports all payroll tax authorities at the following levels:

• Federal
• State
• County
• City
• School district