Distributions to 401(k)

Oftentimes, owners and executives will meet with their accountants at the end of the year to discuss distributing corporate income and estimating personal income taxes so that adjustments can be made prior to tax filings.

One of the things we see happen quite a bit during year-end season is highly compensated employees making mass contributions to maximize their 401(k). There are a couple of ways this can be handled when it comes to taxation, and it's important to discuss with your accountant the proper handling so that it can be reported correctly through payroll and accurately on your W-2.

  1. Employee turns already-earned funds back over to the employer for deposit to 401(k).
  2. Employer provides employee with an end of year distribution (or bonus), and the net is deposited to 401(k).

Taking the 2016 base limit of $18,000 in 401(k) contributions, let's assume the employee is contributing the entire amount at the end of the year and walk through a couple of examples:

1. The employee wants to make an $18,000 contribution back into their 401(k) from money they've already earned. They make a transfer to their employer in the amount of $18,000, and the employer transfers that money into the employee's 401(k) account.

  • Since 401(k) contributions are pre-tax for Federal and State Withholding (in most states), the tax impact in this scenario is a reduction of Federal and State taxable wages.
  • Here's what happens to the W-2:
    • Box 1 (Federal Taxable Wages): -18,000
    • Box 2 (Federal Taxes): 0
    • Box 3 (FICA Taxable Wages): 0
    • Box 4 (FICA Taxes): 0
    • Box 5 (Medicare Taxable Wages): 0
    • Box 6 (Medicare Taxes): 0
    • Box 12, Code D: +18,000
    • Box 16 (State Taxable Wages): -18,000
    • Box 17 (State Taxes): 0

2. The employer is going to give the employee a year-end distribution designed to max out their 401(k). They record earnings on the employee's record, and the net of the "check" ($18,000) is deposited to the employee's 401(k) account.

  • Since 401(k) contributions are not pre-tax for FICA and Medicare taxes, the bonus will be taxable for these taxes, and the $18,000 net needs to be grossed up to cover FICA and Medicare. For the sake of this example, we'll say the employee has not yet reached the FICA maximum; the total gross pay needed for an $18,000 net would be $19,491.07.
  • Here's what happens to the W-2:
    • Box 1 (Federal Taxable Wages): +1,491.07
    • Box 2 (Federal Taxes): 0
    • Box 3 (FICA Taxable Wages): +19,491.07
    • Box 4 (FICA Taxes): +1,208.45
    • Box 5 (Medicare Taxable Wages): +19,491.07
    • Box 6 (Medicare Taxes): +282.62
    • Box 12, Code D: +18,000
    • Box 16 (State Taxable Wages): +1,491.07
    • Box 17 (State Taxes): 0

If you're not sure how to handle the distribution for your scenario, please consult with your accountant and then let our service team know the conclusion you reach so that we can properly report the distribution in payroll and ensure the accuracy of both your contribution and your W-2.


Was this article helpful?
0 out of 0 found this helpful
Have more questions? Submit a request