Is My Retirement Plan Taxable for Social Security and Medicare Purposes?

401(k) statement with a calculator in the backgroun

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 withhold.

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 Medicare.

Employee Contributions

Contributions made to a 401(k), individual retirement account (IRA), or savings incentive match plan for employees (SIMPLE) IRA, are exempt from federal income tax.

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.

Employer Contributions

Employer contributions made to qualified retirement plans are exempt from all taxes.

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.

Retirement plans are a great way to help your employees plan for their future. Learn more about establishing the right retirement plan for your small business.

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