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andrew_johansen
Level 2

What are Employer contributions REALLY? - SS/Medicare Wages

It's my understanding that MY contributions to a 401k are included in social security/medicare wages but employer contributions are not.

 

I'm confused by that...

 

When the IRS says "Employer contributions", is that only the amount my employer matches, or is it what I contribute PLUS my employer's match that we do together through payroll deduction?

2 Replies
Critter-3
Level 15

What are Employer contributions REALLY? - SS/Medicare Wages

When you earn wages  you can have some put into a pension plan.  Those contributions  you make from your wages can reduce your federal taxable income in Box 1 of the W-2 however they cannot reduce your wages for FICA taxes in boxes 3 & 5.  Some states allow the reduction and some don't so that is reflected on the W-2 boxes 15-20. 

 

Now ... the "employers contributions" are what THEY put  into your pension plan are considered "non taxable employee benefits".  They are not subject to FICA or federal taxes by you or the employer since they are not considered earned income.  State rules vary.

Hal_Al
Level 15

What are Employer contributions REALLY? - SS/Medicare Wages

Q.  Why are my contributions, to a 401k plan, subject to FICA tax, but my employer's contributions are not?

A. Just because that's the way the law was written.

 

Q. Are the employer 401k contributions  "non taxable employee benefits"? 

A. Not really.  They are free of FICA tax.  But, they are only tax "deferred"  benefits, for income tax purposes.  When it comes time to withdraw that money (take a "distribution"), the amount distributed will be subject to income tax at "ordinary" income tax rates.  You will not get the more  favorable long term capital gains/qualified dividends tax treatment.  In addition, if you withdraw the money early (without a qualified exception) you will be subject to a 10% penalty.

 

Q. When the IRS says "Employer contributions", is that only the amount my employer matches, or is it what I contribute PLUS my employer's match that we do together through payroll deduction?

A. It's only the employer share.  But your pre (income) tax share will also be subject  to income tax on distribution. 

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