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My spouse works part-time and qualifies for a 401k. She will make less than the $18,000 plus $6,000 catch up limit. So we want to put 100% of her earnings into the 401k. We understand OASDI and Medicare have to be paid. The payroll company is having a difficult time figuring this out. They want to allocate less than 100%, like 92.35% to cover the OASDI/Medicare but I am thinking this will also generate a federal tax and state tax liability, even if small.

What is best practice/proper procedure to accomplish goal?

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The payroll company is correct here.

This answer should give you more information. Basically, "taxable wages" (wages that are listed on your W-2) are different from "wages subject to withholding" which means that the IRS can take Medicare/Social Security out before you can contribute to your pre-tax 401k.

You should have 0 income tax liability if the payroll company takes out the proper amount to compensate for Medicare/Social Security.

IRS link for more information.

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  • The linked answer almost appears to be a duplicate. Leaving this open for now.
    – JTP - Apologise to Monica ♦
    Oct 20, 2015 at 17:01
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    People who are self-employed do not have withholding, and separately pay tax to cover Medicare and Social Security. While the gross wages are subject to those taxes, can't they be paid separately, instead of withholding being the only to pay?
    – donjuedo
    Oct 20, 2015 at 20:49

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