What are Pretax Earnings?
Pretax earnings can be applied to individuals or businesses. In each case, pretax earnings refer to the amount of money an individual or business earns before income tax is taken out. Pretax earnings are also referred to as pretax income or earnings before tax.
In order to determine the pretax earnings for businesses you have to do a little bit of math. To calculate the pretax earnings for a business, you should subtract all of the operating expenses, including interest and depreciation, from the total sales or total revenue.
It’s helpful for businesses to understand what their pretax earnings are so that they can compare revenues across areas where corporate taxes may differ.
Pretax Earnings Scenario
Individual Pretax Earnings
Mollie is an employee who receives a regular paycheck. When she looks over her paycheck she can see that her employer has paid her income tax for her. Employers will typically pay the state and federal income taxes, social security and medicare for their employees. This means that the check Mollie receives and deposits in the bank is her after tax income. In order to determine what she made pretax, she can check her pay stub for her gross earnings.
Business Pretax Earnings
Frederick is the Chief Financial Officer at his company. The company has locations in three different states. The corporate taxes differ in each state. In order to determine how much revenue each location is bringing in Frederick needs to compare the pretax earnings of each store.
Frederick asks the store managers to submit reports with all of the operating costs and total revenues for their store. Once Frederick receives the data he can determine which stores are making the most profits. The numbers would be skewed if he looked at the after tax income, since the tax laws in each state are different.