Do You Pay FICA Taxes on Your 401(k) Contributions?

Yes. Employee contributions to both traditional and Roth 401(k) plans are generally subject to Social Security and Medicare taxes, even though traditional contributions usually reduce wages used to calculate current federal income-tax withholding. Roth contributions generally reduce neither federal income-tax wages nor FICA wages. Employer matching and nonelective contributions are generally not subject to FICA because they are employer contributions rather than employee salary deferrals. This means that increasing a traditional contribution may reduce federal income-tax withholding without reducing Social Security or Medicare withholding. The distinction can also explain why the wage amounts shown for federal income tax and FICA differ on a pay stub or Form W-2.

What FICA Covers

FICA stands for the Federal Insurance Contributions Act. It refers to the payroll taxes that fund Social Security and Medicare. FICA is calculated separately from federal income-tax withholding, so a deduction that changes federal income-tax wages does not necessarily change the wages used to calculate Social Security and Medicare taxes. For more on the difference, see FICA and federal income tax.

How Traditional 401(k) Contributions Affect FICA

A traditional 401(k) contribution is often called “pre-tax” because it generally reduces the wages used to calculate current federal income-tax withholding. However, an employee’s elective salary deferrals remain wages for Social Security and Medicare tax purposes. In this context, “pre-tax” does not mean exempt from every tax.

The IRS guidance on retirement-plan contributions explains that employee elective deferrals are generally subject to FICA and Medicare taxes. Employer contributions generally are not. For a related explanation, see whether 401(k) contributions are subject to FICA.

For example, suppose an employee earns $1,500 in gross pay for a pay period and contributes $150 to a traditional 401(k). Federal income-tax withholding may be calculated using wages reduced by the contribution, depending on the employee’s withholding elections and payroll setup. FICA is generally calculated on the full $1,500, assuming those wages are subject to both Social Security and Medicare taxes.

At the standard combined employee FICA rate of 7.65%, taxes on $1,500 would be about $114.75 if the full amount is subject to both parts of FICA. The 401(k) contribution does not reduce that amount. Take-home pay may nevertheless fall by less than $150 because the traditional contribution can reduce current federal income-tax withholding. The actual paycheck effect depends on the employee’s circumstances and other deductions. For more on paycheck deductions, see how pre-tax deductions affect pay.

How Roth 401(k) Contributions Affect FICA

Roth 401(k) contributions are made from pay included in current federal income-tax wages. They do not reduce those wages or FICA wages. Social Security and Medicare taxes apply before the Roth contribution is deposited into the plan.

Choosing traditional or Roth contributions is mainly a decision about when to pay income tax. Neither type of employee contribution generally avoids FICA. The table compares the usual treatment of employee contributions; individual payroll circumstances can affect reported wage amounts.

How Employer Contributions Are Different

The source of the money matters. Employee elective deferrals come from the employee’s salary and are generally subject to Social Security and Medicare taxes. Employer matching contributions are added when the employee contributes. Employer nonelective contributions may be made whether or not the employee contributes. Both types of employer contributions are generally not subject to FICA and Medicare taxes.

Why Pay Stub and W-2 Wage Amounts May Differ

A traditional 401(k) contribution generally reduces current federal income-tax wages but not Social Security or Medicare wages. As a result, the wage amounts reported for these purposes may differ. That difference is not automatically an error because it can reflect the different tax treatment of the contribution.

Roth contributions generally reduce neither federal income-tax wages nor FICA wages. If the amounts on a pay stub or Form W-2 do not appear to match your elections, first check whether the contribution is traditional or Roth. Then review the wage amounts and payroll codes shown for Social Security and Medicare. A pay stub can help you identify how the deduction was recorded; see what a pay stub shows. Your payroll or benefits team can explain how the deduction is recorded in your employer’s system.

What Changes When You Adjust Your Contribution Rate

Increasing a traditional contribution usually lowers take-home pay by less than the contribution amount because federal income-tax withholding may decrease. Social Security and Medicare withholding generally will not decrease as a result of the contribution.

Increasing a Roth contribution may lower take-home pay by closer to the full contribution amount because Roth deferrals do not reduce current federal income-tax wages. Your actual paycheck also depends on your earnings, pay frequency, other deductions and tax elections. Before changing your contribution, check whether you are choosing traditional or Roth contributions and how much you plan to defer. Also check whether you are contributing enough to receive any available employer match. A payroll calculator or sample pay stub can help estimate the effect, but it may not capture every detail of your situation.

*This article is for general informational purposes only and is not legal advice.