Deposits to a 401(k) are the contributions you make toward your employer-sponsored retirement plan. Your employer sends your contributions to the plan provider, which funds your account. Your employer withholds taxes from your contributions before sending them to the provider. Social Security withholding is required on all 401(k) contributions.
Social Security Rate
The federal government sets the annual Social Security tax-withholding rate. You may obtain the rate for the tax year in question from Internal Revenue Service Circular E or the Social Security Administration website. As of 2012, your employer withholds Social Security tax at 4.2 percent of taxable earnings, up to $110,100 for the year.
To calculate Social Security tax withholding on 401(k) contributions, your employer first determines your gross wages for the pay period. Gross wages are your earnings before deductions. Your employer subtracts Social Security tax from your gross wages and then deducts your 401(k) contribution. For example, you earn $450 for the weekly pay period and elect 6 percent toward your 401(k) account. Multiply $450 by 0.042 to arrive at $18.90, which is your Social Security withholding for that week. Then subtract your 401(k) contribution of $27 ($450 multiplied by 0.06).
If your employer matches your 401(k) contributions, your deposits include the matching amounts. Unlike your contributions, the match is not subject to Social Security tax. Note that Social Security and Medicare taxes go hand in hand, as they are both authorized by the Federal Insurance Contributions Act. Specifically, if Social Security tax applies, so does Medicare tax. Your 401(k) contributions are subject to Medicare tax of 1.45 percent, as of 2012.
Because 401(k) contributions are subject to Social Security tax, they are included in Social Security wages on Form W-2. The form shows your annual wages earned and taxes withheld for the year; you use it to file your tax return with the IRS and applicable state and local agencies. Your employer files the W-2 with the Social Security Administration, which credits you for retirement benefits based on the Social Security wages reported on the form.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.