My mother retired Dec/2021. She will be receiving a vacation payout. That money will be going into her 403b. What taxes are taken out of her paycheck?

[ThomasM125]

If you mean she is contributing all of her vacation pay to her 403(b) retirement plan, then there would just be social security and Medicare taxes withheld, which is about 15% of her income.

[Opus 17]

This will be on her 2022 W-2 if actually being paid in 2022.

Because money contributed to a qualified retirement plan is still considered earned income, it is subject to social security and medicare tax, even if it is exempt (or pre-tax) from income tax.  For example, if her vacation payout is $5000, one of two things could happen.

1. The school puts $5000 into the 403(b).  Box 1 of her W-2 shows zero, but boxes 3 and 5 show $5000 of SS and Medicare wages.  Box 4 and 6 show $310 of SS tax and $72.50 of Medicare tax.  The school will ask your mother to pay these taxes back to the school (since they should have been withheld but weren't.)

2. Or, the school reports $382.50 of taxable wages in box 1, $5000 of SS and Medicare wages in box 3 and 5, and $310 of SS tax and $72.50 of Medicare tax in box 4 and 6.  The school pays these taxes from her taxable wages, so the check amount nets out to zero.  And $4617.50 goes into the 403(b).  

She will need to confirm with HR exactly how they will handle the payout.  

[trinag70]

Thank you very much.

I was asking because she is actually receiving a sick day payout ($7575) and a vacation payout ($16000).

She wanted all $23575 to go to her 403b.

The payroll person told her that the sick payout would have no deductions except for state,  and the vacation payout would have S.S., Medicare and state.  I thought that was strange because my mother is collecting S.S. and paying premiums to Medicare.

I just want my mom to have the correct deductions to come out.

[trinag70]

Even if she is collecting S.S. and paying Medicare premiums?  She still has to have those deductions?

[Opus 17 · Accepted solution]

@trinag70 

A person always pays Social Security and Medicare tax on income earned from working, no matter how old they are and no matter if they are also already collecting Social Security.  (In some cases, paying additional Social Security tax into the system by working after retirement may increase a persons future benefits.)

Everything the employer pays as compensation for services performed is considered earned income, including cashing out your sick pay bank or severance pay.  Even though contributions to qualified pre-tax retirement plans are not subject to income tax, they are still earned income and are subject to Social Security and Medicare tax.  How much income tax is withheld is calculated with the usual withholding formula. How much income tax is owed at the end of the year depends on the person’s overall income and other tax situation’s. But the Social Security and Medicare tax always comes out first.

[trinag70]

Thank you so much Opus 17.  

You have helped so much!!