Author Topic: Is 401k Employee Contribution and Cafe 125 amount NOT deducted from base salary?  (Read 907 times)

moneyQandA

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Sorry for lengthy post. Thanks in advance.

Hello, I was closely reviewing my W2 form for the first time. Was wondering on this. Can experts over here clarify please?

I see that the following components in my W2 are on top of my base salary (attached redacted picture to show the structure I'm talking about). They are not part of my base salary.

401k (D-Box 12)
other Cafe 125


1. The 401k component in W2 This amount is the Employee's contribution. Not the Employer 401k match. (I validated by reviewing my 401k MassMutual statement for Employee's contribution)
2. Amount in Other Cafe 125 - I'm assuming this is the pre-tax amount for the health insurance deducted from pay stub as Employee's contribution towards health insurance premium. (Generally few employers contribute towards health insurance premiums for employees)

On top of #1 and #2 mentioned above - Employer also does 401k match and also contributes towards health insurance premium. These two amounts are not shown in the pay stub or in Employee's W2 form.


My questions are:

1. Is all the above understanding correct?
2. All these years, I thought employee pays pre-tax health insurance premium from his base salary. Was I wrong?
3. If all above is regarding 401k is correct, if Employee doesn't opt for 401k, he is not going to get that Employee's contribution amount in his paystub anyways because its not part of his base salary.  - Is this correct?

MoseyingAlong

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To start, I'm not really understanding your question so if this isn't helpful, please ignore.

If you look at box 3 on your W2 (the Social Security wages), you'll see a larger number that is closer to your total compensation. That's what I would call your pay. Base pay to me indicates an amount before any bonuses or benefits are added in. If you receive bonuses, they will be included in the box 3 amount.

Box 1 will be smaller due to any pretax contributions to your 401k and other pretax contributions. That's what calculated on the portion of your W2 you posted. I'd call that your taxed wages.

The employer contributions to your 401k are not included in either number. If the employee doesn't not contribute to their 401k, there will not be anything to deduct to end up with a lower box 1 amount. So for your 3rd question, yes, I think your understanding is correct. Were you actually wondering where employER contributions show up?

The Cafe 125 amount could be any number of pre-tax deductions. The employer-provided health insurance is reported using code DD in box 12 of your W2.

Hope that helps.

secondcor521

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Your understanding seems somewhat confused to me.  I think @MoseyingAlong is essentially correct, but his answer to you seems a bit confusing to me as well, so let me add my version of an answer.  Maybe it will help you.

You were paid a salary (and maybe bonuses) of, for sake of example, $150,000.  You decided to contribute $10,000 to your 401(k) plan, and you participated in some sort of cafeteria plan (perhaps a FSA or something) of $5,000.

In the US, for W-2 wages, there are three kinds of taxes you get to pay, and they are all calculated differently:

1.  You have federal income taxes, which would be taxed according to income tax brackets after your standard deduction but only on the amount of your salary after the 401(k) plan and the cafeteria plan.  So for income tax purposes, you're only paying taxes on $135,000.

2.  Social Security taxes.  You pay your half of Social Security taxes (sometimes called OASDI, which is an acronym for the benefits the program provides) at 6.2% of your income up to some maximum taxable amount, which increases from year to year with inflation but in 2019 was $132,900.  In this case you would pay that 6.2% on your $150,000 up to that $132,900, so you'd only pay 6.2% of $132,900.

3.  Medicare taxes.  You pay your half of Medicare taxes at a rate of 1.45% of your full salary.  Medicare taxes work like Social Security except there is no maximum taxable amount.  So you'd pay 1.45% of the full $150,000.

Because each of these is taxed differently, your W-2 statement reflects your income in three different ways.  The boxes 1, 3, and 5 reflect your income according to the varying taxation methods above, and boxes 2, 4, and 6 show the total amount withheld (in the case of box 2) and paid (in the cases of box 4 and 6).

So the $10,000 and $5,000 in my example do come out of your wages (meaning you're paying for them), but they do also reduce your salary that is taxed for federal income tax purposes, so you should see a reduction in your federal taxes because of the choices you made to participate in your employer's benefit programs.  This is what is meant by the phrase "pre-tax" benefits.

It is emphatically *not* the case that you get to add the $10,000 and $5,000 on top of your base salary of $150,000 to get a total of $165,000 in compensation, as you seem to be saying in the OP.

Employer contributions to your benefits are not reflected in your W-2 wages, but as noted above they are included in the box 12 codes as additional information.

In the case of an employee who chooses not to participate in the 401(k), then their box 1 wages would be higher by that $10,000, and they would pay more in federal income taxes.  Most states piggyback off the federal definition of wages, so they would also pay more in state taxes as well.

...

Here is a decent link on cafeteria plans:

https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/understanding-section-125-cafeteria-plans.aspx

This explanation may also help:

https://ttlc.intuit.com/community/retirement/discussion/are-contributions-to-401k-plans-subject-to-fica-and-medicare/00/30372

MDM

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I see that the following components in my W2 are on top of my base salary
Depends what you mean by base salary.  If you mean "gross salary" (aka "income before any deductions") then there can be nothing "on top of" that.

See the case study spreadsheet for common items that get subtracted from gross salary to give
a) FICA base wages, and
b) W-2 Box 1 amount.

moneyQandA

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You are awesome!! Thank you  very much  for elaborately clarifying. Appreciate it.

moneyQandA

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To start, I'm not really understanding your question so if this isn't helpful, please ignore.

If you look at box 3 on your W2 (the Social Security wages), you'll see a larger number that is closer to your total compensation. That's what I would call your pay. Base pay to me indicates an amount before any bonuses or benefits are added in. If you receive bonuses, they will be included in the box 3 amount.

Appreciate your response. Definitely helpful. Thank you very much.

moneyQandA

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Hello secondcor521,
I figured out why my gross salary was showing way too high in W2.
For that year, they generated two $0 take home paystubs with huge relocation expenses as line item(in that paystub, there were taxes also deducted). The same relocation expense was considered as part of my gross pay and total gross pay in W2 showed very high.
Question:

1. While filing IT returns, can I have this relocation expenses( company re-imbursed this amount already) in the deductions?
2. Because my total gross increased by a good number, is it going to impact my Federal taxes ? I mean, am I going to pay more taxes because of this?

Thank you!
Your understanding seems somewhat confused to me.  I think @MoseyingAlong is essentially correct, but his answer to you seems a bit confusing to me as well, so let me add my version of an answer.  Maybe it will help you.

You were paid a salary (and maybe bonuses) of, for sake of example, $150,000.  You decided to contribute $10,000 to your 401(k) plan, and you participated in some sort of cafeteria plan (perhaps a FSA or something) of $5,000.

MDM

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1. No.  See https://www.moving.com/tips/irs-moving-deductions/ for more.
2. Yes.

Some companies "gross up" your moving expense reimbursement by the amount of tax you may pay.  Some don't.

moneyQandA

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Thank you very much for the clarification.  Appreciate your time.

1. No.  See https://www.moving.com/tips/irs-moving-deductions/ for more.
2. Yes.

Some companies "gross up" your moving expense reimbursement by the amount of tax you may pay.  Some don't.