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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.

  • I added the United States tag as you said 401k. If that's not correct, please put in the proper country. You might verify that you do not have a Roth 401k, which is not tax deductible. – Brythan Jan 3 '17 at 3:21
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    I believe Medicare and SS withholdings are based on you gross without the 401k deduction. SS security and Medicare are in separate buckets from federal income tax. Your contribution to SS is roughly 6% which is about what you are reporting. – Charles E. Grant Jan 3 '17 at 3:55
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    You should be mindful of the maximum 401k contribution limits. It might be better to not put all of your money in the 401k for part of the year and then be prevented from putting any more, but just enough to reach the limit through the whole year. – Tim S. Jan 3 '17 at 12:52
  • Don't forget that regular 401(k) deduction is for the year the 401(k) contribution is made (so contributing now will not reduce your 2016 taxes). Unless you are using an IRA variety and not a 401(k) variety, there's no benefit in dumping it all in now (unless you're going to be no longer employed soon). – Joe Jan 3 '17 at 21:22
  • Also note: the FICA taxes are paid with post-tax income, so the federal withholding is correct. IL tax should also be withheld for that, probably, as it's based on federal AGI; they should really take 3.75% out for you there also. – Joe Jan 3 '17 at 22:13
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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.

  • So does that mean if you had inadvertently decided to withhold 99% to your 401k they would be direct withdrawing from your account to pay FICA? – Michael Jan 3 '17 at 4:49
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    @Michael: Then the 401k contribution won't be 99% -- it will be limited to whatever's left after FICA has been deducted. – user102008 Jan 3 '17 at 5:30
  • There is a limit on FICA: 6.2% only on the first 118k of income earned. I believe the limit has gone up to about 127k for FY 2017. – jungledev Jan 3 '17 at 9:18
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    @jungledev - you'll hit the 18K (or 24K) limit on 401K long before the SS cap! :D – TTT Jan 3 '17 at 19:54
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    It's going to vary from employer to employer. My experience has been that a request to withhold so much as to leave none for SS & medicare (and health insurance employee premium) was simply rejected. – stannius Jan 3 '17 at 20:15
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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

  • SS and Medicare are calculated based on your FICA taxable income. It's related to your gross income but it's not necessarily the same. For instance, a contribution to a HSA reduces your FICA taxable income. Some forms of income increase your federal taxable but not your FICA taxable. That said, one difference relevant to the OP's question is that 401(k) contributions reduce federal taxable income but not FICA taxable. – stannius Jan 3 '17 at 20:12
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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.

  • Actually, I'm 52. Where do you get that bit about only the first $5,500 being deductible for a 401(k)? The entire 401(k) is deductible. – Tom Baxter Jan 3 '17 at 3:37
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    5500 is the IRA limit, not the 401k limit. – mhoran_psprep Jan 3 '17 at 3:38
  • Corrected for 401k & age. Principle is still the same, apologies. You should work with a CPA/Financial Planner for your individual situation. – alyehoud Jan 3 '17 at 3:47
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    I guess I have to be even more explicit. I have not hit the $26k limit for those over 50. I started the contribution in late 2016 and right off the bat I saw the remaining 10% eaten up by taxes with zero take home pay. – Tom Baxter Jan 3 '17 at 3:58
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    @TomBaxter - This is a small detail but I believe the limit is 24K not 26K. (18K + 6K catch-up.) – TTT Jan 3 '17 at 20:00

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