Employee deferrals under section 401(k) are subject to which taxes?

• A. federal income, social security and Medicare taxes
• B. social security and Medicare taxes
• C. social security, Medicare and FUTA taxes
• D. federal income, social security, Medicare and FUTA taxes

Answer: (C)

Elective deferrals to a 401(k) plan are not included in the employee’s current federal income tax withholding, but they are still treated as wages for payroll tax purposes. For FICA, Social Security and Medicare taxes apply to wages, including those deferrals. In addition, FUTA taxes are calculated on wages paid to employees for unemployment tax, and deferrals are considered part of those wages for purposes of the FUTA base. So employee 401(k) deferrals are subject to Social Security, Medicare, and FUTA taxes. The deferral is not taxed for federal income tax in the year of contribution, which is why federal income tax isn’t part of the payroll tax mix here.