• 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.

• Processing class 71 (Wage type tax classification) defines the tax combination that needs to be done. Table : V_512W_D
•  Each wage type is assigned to a taxability class via processing class 71.
• The tax classes are assigned to each tax model in different combinations in table T5UTM (Tax Model) and those values indicates for which wage types the tax type combination will be used.
• For example, if a wage type contains value ‘1′ (regular wages) in Wage type tax classification 71 and only tax models (assigned for each tax authority) which have a ‘1′ in the tax class field (defined in tax tables) will apply to the wage type and hence only those wages will be taxed using the specified combination.
• To quote one more example, say a wage type should not be taxed for a particular state but for other states it should be taxed. In this scenario, a new specification class can be created and assigned to the processing class 71 against respective wage type. The same value should be entered in the tax class field against all the tax models for which the tax has to be calculated and it should not be assigned to the model where it should not be taxed.