Under the Federal Insurance Contributions Act, your employer must withhold Social Security and Medicare taxes from your wages. Certain pretax wages are exempt from both taxes, such as premiums for health insurance established through your employer’s cafeteria plan. Because your 401(k) contributions are not exempt from FICA, you must pay Social Security and Medicare taxes on your deductions.
Effect on Taxes
Regardless of whether you have a tax-deferred or after-tax 401(k) -- or Roth 401(k) -- account, your employer must take FICA taxes out of your payments. Tax-deferred 401(k) deductions are exempt from federal and state income tax withholding in all states except Pennsylvania, as of 2014. In this case, you do not receive a tax break for FICA taxes, but you get one for federal and likely state income tax at the time of payroll deduction. With an after-tax account, all withholding taxes come out of your contributions at the time of payroll deduction. In this case, you do not get a tax break at the time of payroll deduction.
FICA Withholding Rates
As of 2014, your employer withholds Social Security tax from your wages, including your 401(k) deductions, at 6.2 percent, up to the annual wage limit of $113,700. Your employer withholds Medicare tax at 1.45 percent of all your wages.
FICA Wages and Taxes On Your W-2
Because you pay FICA taxes on your 401(k) deductions, your employer must count your contributions as taxable income on your annual W-2. Your wages, including your 401(k) contributions, from which Social Security tax was withheld, goes in Box 3 of your W-2. Your wages from which Medicare tax was deducted goes in Box 5. The Social Security and Medicare taxes that you paid, including the amounts on your 401(k) contributions, respectively go in boxes 4 and 6.
FICA Vs. Federal Income Tax Reporting
Regardless of whether you have a tax-deferred or after-tax 401(k) account, your contributions must show in your Social Security and Medicare wages on your W-2. However, if you have a tax-deferred account, Box 1, which stands for your federal gross taxable wages, does not include your contributions. This is because your deductions are exempt from federal income tax withholding. For informational purposes, your employer may put your tax-deferred contributions in Box 12. If you have an after-tax account, Box 1 includes your 401(k) deductions because your contributions are not exempt from federal income tax withholding.
Taxes on Withdrawals
You do not pay FICA taxes on your contributions when you withdraw from your 401(k) because you already paid those taxes at the time of payroll deduction. If you have a tax-deferred account, you must pay federal and likely state income tax on your withdrawals because your employer did not withhold them from your paychecks. If you have an after-tax account, you do not need to pay any taxes on your contributions upon withdrawal because your employer withheld them from your wages.
- IRS.gov: FAQs for Government Entities Regarding Cafeteria Plans
- Sure Payroll: Sure401k Helps Employees Make Informed Decisions
- CNN Money: 401(k) Vs. Roth 401(k) -- Which One's Right for You?
- IRS.gov: Topic 751 - Social Security and Medicare Withholding Rates
- IRS.gov: 2014 Form W-2
- TurboTax: Where Do I Enter My 401(k) Contribution?