I get paid bi-weekly and my pay check is ALWAYS the same dollar amount with the same taxes taken out. My employer does my Matching Contribution on a quarterly basis, every time I get my paycheck that shows the Employer Matching Contribution that was made, my taxes are always higher. Why do I pay taxes on the Employer Matching Contribution???
Probably because your employer's matching contribution is considered to be part of your compensation, which therefore makes it taxable. If it isn't taxed now, then you'd still have to pay the tax on the principal amount contributed by your employer when you cash in the investment. That would be a real mess.
Here's an abstract from the IRS on this:
Topic 410 - Pensions and Annuities If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable. This topic does not cover the taxation of social security and equivalent railroad retirement benefits. For information about tax on those benefits, refer to Topic 423. The pension or annuity payments that you receive are fully taxable if you have no investment in the contract due to any of the following situations: You did not contribute anything or are not considered to have contributed anything for your pension or annuity Your employer did not withhold contributions from your salary, or You received all of your contributions (your investment in the contract) tax-free in prior years. If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid. This amount is your investment in the contract, and includes the amounts your employer contributed that were taxable to you when contributed. Taxpayers figure the tax on partly taxable pensions by using either the General Rule or the Simplified Method. For more information on the General Rule and Simplified Method, refer to Topic 411. If the starting date of your pension or annuity payments is after November 18, 1996, you generally must use the Simplified Method to determine how much of your annuity payment is taxable and how much is tax-free.
If you want to read the entire publication, here's the IRS page link.
I hope this helps.