Investing regularly in a 401(k) is a sound financial decision. Unfortunately, hardly anyone is exempt from taxes; even your 401(k) contributions are subjected to them. This includes Social Security tax, which your employer withholds from your paychecks. Social Security tax is sometimes called FICA or OASDI tax. Depending on your employer, it may show on your pay stubs as one of those acronyms, or simply as “SS Tax.”
You make your 401(k) contributions either with pretax or after-tax money. The former means that your contributions are deferred from taxes until a future date, such as when you withdraw money from the plan. In the latter case, your employer takes taxes out of your contributions at the time of withholding. Pretax 401(k) plans include traditional 401(k)s and IRAs. After-tax plans include Roth 401(k)s and IRAs.
Your employer takes Social Security tax and Medicare tax, but not federal —and, in most cases, state — income tax out of your 401(k) contributions. When you withdraw your money from the plan, that’s when you pay federal — and, if applicable, state — income tax on your contributions. You don’t owe any Social Security tax or Medicare tax on your contributions since your employer already withheld them. With an after-tax plan, all taxes come out of your paycheck at the time of withholding. So you would not owe any taxes on your contributions when you withdraw your money from the plan.
Whether your 401(k) plan is pretax or after-tax, include your contributions in your gross pay when calculating Social Security tax. For example, you earn $1,220 biweekly and pay $120 toward your 401(k) plan. As of 2012, figure the entire $1,220 at the rate of 4.2 percent for Social Security tax.
Your employer enters your Social Security wages for the year in Box 3 of your annual W-2. Since Social Security tax applies to 401(k) contributions, Box 3 includes all amounts you contributed to your 401(k) plan. The amount in Box 3 should not exceed the annual wage limit for Social Security tax, which is $110,100, as of 2012. Box 4 of the W-2 shows all the Social Security tax you paid for the year.
Pay Stub Versus W-2
The year-to-date gross for Social Security wages on your last pay stub for the year should include your 401(k) contributions. That amount might differ from what’s on your W-2. If you have nontaxable benefits or pretax deductions —which, unlike 401(k) contributions, are exempt from Social Security tax — they would not be included in your Social Security wages on the W-2, though they would show your pay stub. In this case, to balance the W-2 with your last pay stub for the year, add nontaxable benefits and pretax deductions that are exempt from Social Security tax to the amount shown in Box 3 of the W-2.
- IRS.gov: 401(k) Resource Guide - Plan Sponsors - 401(k) Plan Overview
- Patriot Software: A Closer Look at After-Tax Deductions
- Social Security Administration: 2012 Social Security Tax Rate and Maximum Taxable Earnings
- Charles Schwab: Roth 401(k) Versus Regular 401(k) Calculator
- Washington State University: Year-to-Date
- Western Washington University: 2010 W-2 Form Information
- IRS.gov: Form W-2
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