Is My Retirement Plan Taxable for Social Security and Medicare Purposes?
As an employer, you’re responsible for withholding payroll
taxes from your employees’ paychecks. You might also deduct things like health
insurance premiums, child support payments, and retirement contributions. Some
deductions are taxable, so you’ll take them out of an employee’s paycheck after
calculating their taxes. Other deductions are not taxable, so you will need to remove
those amounts from your employees’ gross pay before calculating how much tax to
Generally, employee retirement contributions are exempt from
federal income tax but are taxable for Social Security and Medicare purposes. Employer
contributions are usually exempt from all taxes, including Social Security and
There are exceptions, though. Roth 401(k) and Roth IRA plans
are taxable to federal income tax. Your staff members might prefer a Roth
401(k) or Roth IRA because they won’t be taxed on withdrawals when they retire.
Employee contributions made to any of these plans, however,
are taxable to both Social Security and Medicare. To calculate your employee’s
taxes, you’ll remove their contribution after calculating Social Security and
Medicare, but before calculating the income tax withholding.
For example, although employers cannot contribute to
traditional IRAs, they can contribute to SIMPLE IRAs. SIMPLE plans are ideal
for small businesses because employers can only establish them if they cannot
sponsor another type. Any nonelective (2%) or matching contributions you make
to an employee’s SIMPLE IRA are exempt from all taxes, including Social
Security and Medicare.