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401(k) deferral taxation

I'm looking for some commentary on 401(k) deferral with regard to bonus payments.

When annual bonuses are paid, the amount of 401(k) deferral is based upon the deferral percentage elected under the bonus election. The bonus deferral election is separate from the salary deferral elections. So employees log into the deferral provider and can elect X% deferral on their salary and X% on their bonus deferral.

I'm concerned how the HRIS system is calculating bonus checks for employees who defer 100% of their bonus earnings. I want to know if the HRIS programming is correct for paycheck taxes. I did some research and can't find the correct method of taxation.

Employee bonus = $2,269.55
401(k) Deferral % = 100% amount w/h = 2,006.09
Medicare tax w/h = $32.91
SS tax w/h = $140.71
State tax w/h = $23.98
Federal tax w/h = $65.86

I determined what the HRIS system is doing. It's satisfying the FICA tax obligation, calculates an amount of 401(k) withholding and leaves enough money to satisfy 25% withholding for federal taxes and CT state taxes. The difference between $2,269.55 - $2,006.09 = $263.46. That is the taxable wages of the paycheck. 25% of that is $65.86.

Is this the only way to calculate the check correctly according to IRS for deferrals of 100%?


  • You need to read YOUR company's 401(K). All plans are different, and you need to make sure that this action is allowable under YOUR company's plan.

    Past that there is some hard legal requirements that 401(k) plans cannot discriminate in favor of Highly Compensated Employees. You can be looking at some truly huge penalties if this is not followed.

  • Yes, there is no real way to defer 100% in all reality, even if the plan document does allow for it because the employee must pay FICA taxes (at minimum) along with any income taxes owed on amounts not deferred.

    There is not a standard way, but what your employer is doing is best business practice such that it relieves them of any tax liability of underwithholding. The IRS to my knowledge hasn't pontificated and this is a question that comes up on another board also. I've never seen another option, unless the employer chooses to calculate income tax based on the W-4 election and combines with other pay in the pay period then subtracts out withholding that has already been paid...rather than the 25% supplemental pay option (see quote below). Because FIT at least wouldn't be $65 on $263 -- at s0, it would be around $18 and at other allowances it would even be less. But again, that is an employer choice.

    (From IRS Publication 15 2017-- "
    1.If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages.

                1.Withhold a flat 25% (no other percentage allowed).
                  2.If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to, alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. 

    2.If you didn't withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. ")

    Most 401k plans I have seen have a caveat about what 100% means if they allow for that % to be deferred either on regular earnings or bonus earnings.

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