When employers match employee contributions to their 401(k) retirement savings plans, they receive a tax deduction for the matching amounts. This means that the money used to match employee contributions is not subject to income or payroll taxes. This tax break provides an incentive for employers to offer 401(k) plans and to match employee contributions, which can help employees save more for retirement. The tax deduction is available for both traditional and Roth 401(k) plans.
401(k) Employer Contribution Deductions
Employers who contribute to their employees’ 401(k) retirement plans may be eligible for tax deductions on those contributions. These deductions can help reduce a company’s taxable income, potentially saving money on taxes.
Types of Deductible Employer Contributions
- Matching contributions: Employers can choose to match a portion of employee contributions to their 401(k) plans, up to certain limits. These contributions are deductible as a business expense.
- Non-matching contributions: Employers can also make non-matching contributions to their employees’ 401(k) plans. These contributions are subject to certain limits and are deductible as a business expense, similar to matching contributions.
Limits on Employer Contributions
The amount of employer contributions that are eligible for tax deductions is limited each year. For 2023, the limit is the lesser of:
- 100% of the employee’s compensation (up to a maximum of $330,000)
- $66,000
In addition, employers may make catch-up contributions for employees who are age 50 or older. These contributions are not subject to the annual limit but are limited to $7,500 for 2023.
Tax Reporting Requirements
Employers who contribute to their employees’ 401(k) plans must report those contributions on their annual tax return. The contributions are reported on Form 5500, Schedule SB (or Schedule E in certain cases).
Table Summary of Employer Contribution Deductions
| Type of Contribution | Deductible? | Limit |
|---|---|---|
| Matching contributions | Yes | Lesser of 100% of employee compensation or $66,000 |
| Non-matching contributions | Yes | Lesser of 100% of employee compensation or $66,000 |
| Catch-up contributions (for employees age 50 or older) | Yes | $7,500 |
Payroll Tax Savings
Employers who match employee 401(k) contributions can enjoy significant payroll tax savings. These savings are realized in two ways:
- Reduced FICA Taxes: FICA taxes, which include Social Security and Medicare taxes, are not paid on employer matching contributions. These contributions are considered a form of compensation, but they are excluded from taxable wages for FICA purposes.
- Reduced FUTA Taxes: FUTA, or Federal Unemployment Tax Act, taxes are also not paid on employer matching contributions. FUTA taxes are levied on wages paid to employees, but employer matching contributions are not considered wages for FUTA purposes.
The following table illustrates the payroll tax savings for different employer matching rates:
| Matching Rate | FICA Tax Savings | FUTA Tax Savings | Total Tax Savings |
|---|---|---|---|
| 0% | $0 | $0 | $0 |
| 1% | $62 per employee* | $6 per employee | $68 per employee |
| 3% | $186 per employee* | $18 per employee | $204 per employee |
| 5% | $310 per employee* | $30 per employee | $340 per employee |
*Assuming an employee earning $50,000 per year
Welp, there ya go! That’s the lowdown on whether employers get a tax break for matching 401ks. Hopefully, you found this a helpful guide. I know retirement planning can be like trying to decipher an ancient scroll sometimes, but hey, that’s why I’m here! If you’ve got any more burning questions or just need a refresher, swing by again later. I’ll be here, ready to dish out more retirement wisdom. Thanks for reading, folks!