401(k) contributions made by employees are not subject to Social Security tax. This means that the money you put into your 401(k) is not taxed until you take it out in retirement. This can help you save money on taxes now and in the future. However, employer contributions to 401(k) plans are subject to Social Security tax. This means that the money your employer puts into your 401(k) is taxed before it is deposited into your account.
Contribution Limits and Tax Treatment
401(k) contributions are not subject to Social Security (FICA) taxes, meaning that you do not pay the 12.4% employee portion of these taxes (6.2% for Social Security and 1.45% for Medicare) on the money you contribute to your 401(k). This can provide substantial tax savings, especially for high-income earners who pay a higher marginal tax rate.
In 2023, the contribution limit for traditional 401(k) plans is $22,500 (plus a catch-up contribution limit of $7,500 for individuals age 50 or older). For Roth 401(k) plans, the contribution limit is the same, but the money contributed is post-tax, meaning that you do not pay taxes on the contributions but will pay taxes on the withdrawals.
| 401(k) Plan Type | Contribution Limits (2023) | Tax Treatment |
|---|---|---|
| Traditional | $22,500 ($30,000 with catch-up) | Pre-tax (contributions not taxed, withdrawals taxed) |
| Roth | $22,500 ($30,000 with catch-up) | Post-tax (contributions taxed, withdrawals not taxed) |
Pre-Tax Versus Roth Contributions
Whether or not 401k contributions are subject to Social Security tax depends on the type of contribution made:
- Pre-Tax Contributions: These are contributions made with pre-tax dollars, reducing your current taxable income. They are subject to Social Security tax.
- Roth Contributions: These are contributions made with after-tax dollars, meaning they are not deducted from your current income. They are not subject to Social Security tax.
| Contribution Type | Social Security Taxable |
|---|---|
| Pre-Tax | Yes |
| Roth | No |
Withholding Implications for Employer and Employee
When an employee contributes to a 401(k) plan, the contributions are deducted from their paycheck before taxes are calculated. This means that the employee pays less in federal income tax and Social Security tax on their 401(k) contributions. The employer is also not required to pay Social Security tax on the employee’s 401(k) contributions.
The following table summarizes the withholding implications for employer and employee 401(k) contributions:
| Employee | Employer | |
|---|---|---|
| Federal income tax | Reduced | No change |
| Social Security tax | Reduced | No change |
For example, if an employee earns $100,000 per year and contributes $10,000 to their 401(k) plan, the employee will pay about $2,000 less in federal income tax and Social Security tax. The employer will not pay any Social Security tax on the employee’s 401(k) contributions.
Social Security Taxable Income Calculation
Social Security tax is a mandatory payroll tax that funds the Social Security program. It is calculated as a percentage of your taxable income, up to a maximum amount. Contributions to a 401(k) plan are not included in your taxable income, meaning they reduce your Social Security tax liability.
Taxable Income
Your taxable income is your total income minus certain deductions and exemptions. For Social Security tax purposes, the following items are included in your taxable income:
- Wages, salaries, and tips
- Self-employment income
- Interest
- Dividends
- Capital gains
The following items are not included in your taxable income:
- Contributions to a 401(k) plan
- Contributions to a traditional IRA
- Employer-provided health insurance
- Social Security benefits
- Medicare benefits
Social Security Tax Rates
The Social Security tax rate is 6.2%, divided equally between employees and employers. However, the maximum amount of income subject to Social Security tax is $147,000 in 2023. This means that the maximum Social Security tax you can pay is $9,327.
Impact of 401(k) Contributions
By contributing to a 401(k) plan, you can reduce your Social Security tax liability. This is because 401(k) contributions are deducted from your taxable income before Social Security tax is calculated. For example, if you earn $50,000 and contribute $10,000 to your 401(k) plan, your taxable income for Social Security tax purposes would be $40,000. This would reduce your Social Security tax liability by $620.
| Income | 401(k) Contribution | Taxable Income | Social Security Tax |
|---|---|---|---|
| $50,000 | $0 | $50,000 | $3,100 |
| $50,000 | $10,000 | $40,000 | $2,480 |
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