What Is Pretax Income?

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While the term "income" is generally used to refer to the money that a person receives as compensation for performing a job, the term actually applies to all money that person receives during a given period of time. Much of this income is taxed by government agencies, which apply income taxes to various forms of income. The amount of money a person receives before taxes are applied is known as a person's pretax income.

Income Taxes

Income taxes are taxes applied by a government tax collecting agency. Income taxes are applied by state and local governments, as well as the Internal Revenue Service, the federal government's tax collecting agency. While these governments may assess a standard income tax on income, they may also assess several other kinds of taxes, such as Social Security taxes and disability taxes, that are also taken out of the person's paycheck.

Pretax Income for Individuals

The pretax income for individuals includes all of the money that the person is paid before taxes have been taken out. Many people who receive a paycheck from an employer will choose to have the taxable portions of their incomes withheld for each pay period. The amount of money that the person would have received had he not had the taxes taken out would be considered his pretax income, while the actual amount he received is his post-tax income.

Pretax Income for Businesses

Businesses must also pay taxes on income, too. Although the taxes that these business pay are different than the taxes that an individual must pay, the principle of taxation is the same. The amount of profits that a company generates before taxes have been applied can be considered its pretax income or its pretax profits, while the amount of money that remains after taxes have been extracted can be called it post-tax income.

Definition of Income

The definition of income varies depending on the party. For example, a state agency determining whether a person is eligible to receive a form of government benefits may not consider certain kinds of income, such as disability payments or financial aid, in counting income. However, another agency, such as a tax collecting agency, may consider these payments to be income and to be subject to a state income tax.

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