In the withholding calculation using the 2017 percentage method, which deduction reduces the wage base for federal income tax withholding?

• A. Vacation earnings
• B. Regular compensation
• C. 401(k) pre-tax deferral
• D. Married, 0 allowances

Answer: (C)

The key idea is that, in the 2017 percentage method, the wage base for federal income tax withholding is the gross wages minus certain pre‑tax deductions. Deductions that reduce the wage base lower the amount of wages subject to withholding. A 401(k) pre‑tax deferral is exactly such a deduction because contributions to a 401(k) are excluded from federal withholding calculations. Vacation earnings and regular compensation are wages themselves and aren’t deductions that shrink the base. Filing status and allowances (like being married with zero allowances) affect the withholding amount through the tax tables, but they don’t reduce the wage base. So the 401(k) pre‑tax deferral is the deduction that reduces the wage base.