A traditional 401(k) plan meets the criteria of the Internal Revenue Code, which allows an employee to make contributions in pretax dollars. Roth 401(k) plan contributions are made in after-tax dollars. Many employers agree to match employees’ contributions up to a certain amount. For 2011, an employee can contribute up to $16,500 into a traditional 401(k) or Roth plan; employees over age 50 can contribute an additional $5,500. When an employee enrolls into a 401(k) plan, she chooses the percentage that she wants deducted from her paychecks. Therefore, the deduction amount depends on the employee’s election.
1. Obtain the percentage that the employee elected to contribute from the 401(k) agreement that the employee signed.
2. Determine the employee’s gross pay – total income for the pay period before deductions.
3. Deduct 401(k) contributions from gross pay before withholding federal and applicable state and local income tax, if the employee has a traditional 401(k) plan. This process lowers her taxable wages. To arrive at the contribution amount, multiply the elected percentage by the employee’s gross pay. Assuming that she elects to make a 5-percent contribution and earns $400 weekly, her contribution is $20. If the employer agreed to match up to 5 percent, then the total contributions towards her account are $40.
4. Subtract Roth 401(k) contributions from the employee’s pay based on the elected percentage after withholding income taxes. This process does not reduce the employee’s taxable wages.
- Consult your state revenue agency to find out if state and local income tax should be withheld from traditional 401(k) contributions; this practice varies by state.
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