New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
Ask Dr. Don
Reader advised to cash check, move on
Ask Dr. Don

Payroll taxes owed on 401(k) money
 

Dear Dr. Don,
This year, for my annual bonus of $2,500, I signed a request to have the entire amount put into my 401(k). My company said that when they tried to run the checks, the computer wouldn't accept this. So, they changed my contribution to 90 percent of my bonus, or $2,250. The other 10 percent, or $250, was shown on my check stub with deductions of $155 for the Federal Insurance Contributions Act, or FICA, $36.25 for Medicare insurance and $15 for state disability insurance, or SDI. I received the balance of $43.75 as a check.

- advertisement -

I have three questions: Why couldn't I put 100 percent into my 401(k)? I am not anywhere near the $15,500 limit. I think it had to do with the way they input it into the computer. Also, should I have had the above amounts deducted? I thought a "pre-tax" contribution meant the money was taken out before all the taxes. Lastly, because they always match 3 percent of my normal contributions, shouldn't they have contributed 3 percent of the $2,500 (or $2,250 in this case) toward my 401(k)?

I have not cashed the check. I want to know how I should handle this first.
-- Dianne Dénouement

Dear Dianne,
You company properly withheld FICA, Medicare, and SDI taxes from your annual bonus. The tax-deferral is for federal, and possibly state, income taxes -- not payroll taxes. The bright side is that you are not reducing your future Social Security benefits by contributing this money to the 401(k) plan.

It's likely that the 90 percent limitation is company policy to allow for the withholding of these taxes. As the table below shows, you paid 8.25 percent of your $2,500 bonus in these taxes.

Taxes on bonus money:
FICA $155.00 6.20%
Medicare $36.25 1.45%
SDI $ 15.00 0.60%
Total $206.25 8.25%

Whether or not the company's matching contributions extend beyond your annual salary depends on the provisions in its 401(k) plan. You are entitled to a copy of the 401(k) plan documents, but just asking the human resources department can work, too.

If your contribution of your annual bonus was eligible for the company match, it wouldn't necessarily show up on your payroll report. But you would see it on your 401(k) benefit statement or on a statement from the investment company handling your 401(k) account.

Cash the check and move on.

Bankrate.com's corrections policy -- Posted: Nov. 13, 2007
More Q&A stories from Dr. Don
Ask a question

Compare Rates
NATIONAL OVERNIGHT AVERAGES
IRA MMA 0.51%
1 yr IRA CD 0.78%
5 yr IRA CD 1.85%
Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS
FINANCIAL LITERACY
Rev up your portfolio
with these tips and tricks.
- advertisement -
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.