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I'm trying to dump as much money into my 401k as soon as possible. I have authorized 90% of my gross pay to go to my 401k. The company I work for is making that deduction correctly.

My concern is the remaining 10%. My understanding is that federal and state deductions should be based on the remaining 10%, as if I had only earned that 10% for the pay period. What I'm finding instead is that the federal and state deductions are eating up all of that remaining 10%, resulting in $0 take home pay for me. Does this sound right?

Here's an example.

For one period I grossed $1909.50. 90% of that is $1718.55 which was put into my 401k.

Of the remaining $190.95, $44.87 was taken out for for federal withholding, $27.69 for Medicare and $118.39 for Social Security. There was nothing remaining to be taken out out for state withholding (Illinois).

I am married and claim one state and one federal exemption. I do not have a Roth IRA that I'm contributing to.

Tom Baxter
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3 Answers3

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I found the answer. It turns our FICA taxes (Social Security and Medicare) are based on the full gross pay, not after the 401k deduction.

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.

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.

Tom Baxter
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It is the social security and medicare tax, assuming your employer is otherwise doing the accounting correctly. These are deducted from your gross income regardless.

Source: Did the same thing one year, probably asked a question about it here too

CQM
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Edited for 401k numbers:

If I understand your question properly, I think the reason you're paying so much more in taxes is that although you can technically put in 90% of your pay, only the first $18,000 (assuming you're under 50, and $26,000 if older) is tax deferred. So for anything on top of that you would be being taxed, thus eating up the other 10% of your gross.

Based on your example, after roughly three pay periods of paying in from the beginning of the year, you are over the limit and it's no longer a tax-deferred contribution (you get taxed on it before contributing and then again withdrawing as usual). As such, you are not taxed on just the 10%, but after a few periods, on the 100%, being taken the from 10% remaining.

alyehoud
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