Your 401(k) deductions do not reduce FICA wages. Your 401(k) contributions are subject to FICA tax and as such, your employer must apply the FICA tax rate to your gross earnings. Many 401(k) deductions are said to be taken out of your pay on a "pre-tax" basis, but this refers only to income taxes.
FICA taxes consist of Social Security tax and Medicare tax. In 2012, the FICA tax rate is 5.65 percent, which breaks down to 4.2 percent for Social Security and 1.45 percent for Medicare. Employers calculate the FICA tax using your gross pay. There is an annual wage limit for Social Security tax. In 2012, the wage limit is $110,800. Once your earnings reach this limit, the employer no longer has to deduct Social Security tax from your pay.
Often, your 401(k) contributions are made on a pre-tax basis. "Pre-tax" simply means that your income tax on these contributions is deferred until you take payouts during retirement. This arrangement also allows your 401(k) account to grow tax-deferred. Nevertheless, "pre-tax" does not mean that you can avoid any FICA taxes that you would otherwise owe. Remember, FICA taxes are based on your gross pay.
Income Tax Example
Suppose you contribute 10 percent of your pay in your employer's 401(k) plan and contributions are deducted on a pre-tax basis. Your gross pay is $1,788.54 for the biweekly pay period. Your employer matches employee contributions 100 percent to a maximum of 10 percent. This means that your employer deducts 10 percent from your gross pay, or $178.85 and applies this amount to your 401(k) account. Your employer matches your contribution and add this amount into your 401(k) account. Because of the pre-tax deduction for 401(k) contributions, your employer uses $1,609.69 as your wage subject to income tax, which is the result of $1,788.54 less your 10 percent contribution of $178.85.
FICA Tax Example
Using the same example, the amount of pay subject to FICA tax is the full $1,788.54 -- your gross earnings. In this case, the Social Security tax calculation is 4.2 percent multiplied by $1,788.54, which works out to be $75.12. The Medicare tax portion is $25.93, or 1.45 percent multiplied by $1,788.54. Your total FICA taxes are $101.05.
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