How to Calculate My Payroll Tax With Pretax 401(k) Contributions

Whereas a Roth 401(k) retirement plan is structured so you make contributions with after-tax dollars, a traditional 401(k) plan allows you to make contributions with pretax money. If you have the latter, your employer subtracts your contributions from your gross income before deducting the required taxes. Understanding the differences between a Roth 401(k) vs 401k will help ensure that you are prepared to manage your tax duties during your filing. The Internal Revenue Service has standard requirements for calculating federal taxes on pretax contributions, but state and local laws might vary.

Finding Your Payroll Tax

Determine your gross wages. This is your entire earnings for the pay period before any taxes are taken out. Subtract your 401(k) contributions from gross income before calculating federal income tax – the only federal withholding tax that 401(k) pretax contributions are exempt from.

For example, your gross salary for the biweekly pay period is $2,000, and you elect to defer 6 percent to your 401(k) plan. Your biweekly 401(k) contributions equal $120, leaving $1,880 of your salary subject to federal income tax.

To determine federal income tax withholding, consult IRS Circular E for the tax-withholding table that matches the allowances and filing status on your W-4 form and your wages and pay period.

Looking for Additional Taxes

Figure out your Medicare and Social Security taxes based on your gross wages. These two federal taxes are not exempt from pretax 401(k) withholding. For example, as of 2019, your gross salary of $2,000 would be subject to Social Security tax at 6.2 percent and Medicare tax at 1.45 percent. The 2019 annual wage limit for Social Security tax is $132,900, while Medicare tax is withheld from all earnings.

Learning About 401(k) Pretax Regulations

Contact your state revenue agency for pretax 401(k) regulations, if applicable. Many states do not require 401(k) contributions to be included in wages for state income tax withholding, but a few do.

Your pretax 401(k) contributions are subject to federal income tax when you withdraw from the plan, but state and local taxes apply if they were not paid at the time of contribution. However, you do not pay Medicare and Social Security taxes or any other taxes that you paid at the time of the contribution. If your employer matches your contributions, the matching amounts are made in pretax dollars and are subject to applicable taxes when you withdraw from the plan.

Section 125 or cafeteria plans, such as pretax medical, dental and group-term life insurance are not subject to federal income tax, Medicare tax, Social Security tax, and in many cases, state and local income tax. Deduct the premiums from gross wages before calculating those taxes.

Calculating Additional Withholding

Calculate additional withholding, if applicable. A few states require employees to pay additional taxes or insurance. For example, in California, along with personal income tax, employers must withhold state disability insurance from employees’ wages. While pretax 401(k) contributions are not subject to personal income tax in California, they are subject to state disability insurance.

Reporting Your 401k Contributions

Although you will not be required to report your 401k contribution on IRS Form 1040, you may qualify for a Retirement Saving Contribution Credit which can be found on Form 8880.