How to Calculate Actual Wages When You Pay Medical Insurance & Contribute to a 401(k)
If your employer is not required to give you a pay stub and chooses not to, it can be difficult to understand how you were paid. Further, if you contribute to a 401(k) retirement account and a medical insurance plan, figuring out your take-home pay can be confusing even if you have a pay stub. This is because your premiums and contributions may not be taxable, which depends on the type of insurance and retirement plan that you have. If you know how these deductions are made, you can determine your actual earnings.
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Instructions
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Determine if your medical insurance is pretax. Specifically, if you have a cafeteria plan, which meets the criteria of section 125 of the Internal Revenue Code, your premiums are pretax. These types of deductions may show on your pay stub as Sec-125 Med for medical insurance and Sec-125 Den for dental. Pretax medical deductions are not subject to federal income tax, Social Security tax, Medicare tax and, in most cases, state and local income tax. The result is that they lower your taxable wages.
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Determine if your 401(k) contributions are pretax. If you have a traditional 401(k) plan, your contributions are pretax. If you have a Roth 401(k), it’s post-tax, which means your contributions are made after subtracting income tax. Pretax 401(k) contributions are not subject to federal income tax and, in most cases, state and local income tax, but they are subject to Social Security and Medicare taxes.
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Contact the state or local revenue agency to determine whether pretax deductions are taxable for state and local income tax purposes. In most cases they do not apply; however, they can be taxable, like in Pennsylvania.
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Subtract pretax medical insurance premium from your gross pay before calculating federal income tax, Social Security tax and Medicare tax. The remainder is your taxable wages for federal tax purposes.
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Calculate federal income tax by applying the IRS’ Publication 15 tax-withholding table that matches the filing status and number of allowances that you put on your W-4 form, plus your pay period and taxable wages.
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Compute applicable state and local income tax from your taxable wages by applying the state or local revenue agency’s guidelines. In many cases, the state uses a system similar to federal income tax withholding, except that you use your state tax form and the state tax-withholding tables to figure out the withholding. If not, the state may require that your employer use a flat percentage to calculate the tax.
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Subtract post-tax medical and 401(k) from your wages after deducting taxes if your medical and 401(k) plans are not pretax. The remainder is your net or take-home wages.
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Tips & Warnings
If you have a wage garnishment, deduct the garnishment from your wages after deducting payroll taxes. Specifically, wage garnishments are deducted from disposable income, which is your pay after mandatory deductions.
If necessary, ask your human resources department for a list of pretax deductions and applicable taxes.
References
- Patriot Software: What are Taxable Wages?
- IRS.gov: FAQs for Government Entities Regarding Cafeteria Plans
- ING USA: Roth 401(k)
- IRS.gov: 401(k) Resource Guide - Plan Participants - 401(k) Plan Overview
- Pittsburgh Department of Finance: FAQ - Business and Wage Tax
- U.S. Department of Labor: Wage Garnishment
