Does an employer pay taxes on the employee's pre-tax contributions to retirement plans?

The answer depends on which specific taxes you're talking about. For Social Security and Medicare taxes (FICA taxes), both the employer and employee must pay these taxes on the full amount of wages BEFORE any pre-tax retirement contributions. So in your example, you would pay FICA taxes on the full $65,000, not the reduced $40,000. However, for federal income tax withholding purposes, pre-tax retirement contributions like 401k or SIMPLE IRA do reduce the employee's taxable wages. So the employee's income tax withholding would be calculated on the reduced amount ($40,000 in your case), but this doesn't affect your employer tax obligations. Also, remember that state and local taxes may have different rules depending on your location, so you'll want to check those specifically.

I had the same exact question a few months ago when I was setting up payroll for my new business. I was so confused by all the different tax rules and spent hours trying to figure this out. Finally I found this tool called taxr.ai (https://taxr.ai) that analyzed all my payroll documentation and gave me a complete breakdown of which taxes apply to which portions of compensation. It specifically showed me how pre-tax deductions affect employer tax obligations differently depending on the type of deduction and tax. For 401k contributions, it confirmed that I needed to pay Social Security and Medicare on the full amount before deductions, but certain other deductions could reduce my FICA tax burden. It saved me so much time and probably prevented some costly mistakes!

I have to admit I was totally wrong about taxr.ai. After our discussion here last week, I decided to give it a try with my company's payroll questions, including this exact issue about pre-tax contributions. Not only did it immediately clarify which taxes apply to which portions of compensation, but it also found that I've been overpaying FUTA tax by not properly accounting for some exempt payments. The explanations were really clear - it showed me exactly where in the tax code each rule comes from and explained how pre-tax retirement contributions affect different taxes differently. It even generated reports I could share with my bookkeeper. Definitely worth checking out if you're confused about employer tax obligations.

If you're still struggling with this question and need to speak directly to someone at the IRS, good luck getting through on their employer tax line! I tried for THREE DAYS before I found Claimyr (https://claimyr.com) - it's a service that gets you through to an actual IRS agent without the endless waiting. They have this cool demo video that shows how it works: https://youtu.be/_kiP6q8DX5c I used it to connect with a specialist who walked me through exactly which employer taxes apply to pre-tax retirement contributions. Was super helpful for my small business when I was setting up our 401k plan and needed clarification on our tax obligations. The IRS agent was actually really helpful once I could actually reach one!

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There's a key distinction everyone should understand here. There are two types of "pre-tax" benefits: 1. Salary reduction contributions that are exempt from income tax but still subject to FICA (like 401k, SIMPLE IRA) 2. Section 125 Cafeteria Plan benefits that are exempt from BOTH income tax AND FICA (like qualified health insurance) As an employer, I always make sure to categorize these correctly in our payroll system. The difference in employer tax liability can be significant!

Does anyone know if HSA contributions work the same way? My employee wants to contribute to her HSA through payroll and I'm not sure if I need to pay employer taxes on that portion.

This is such a common source of confusion for small business owners! I went through the exact same thing when I first started my business. The key thing to remember is that retirement contributions like 401k and SIMPLE IRA are "pre-tax" for income tax purposes, but they're still considered wages for FICA (Social Security and Medicare) purposes. So in your example with the $65,000 salary and $25,000 retirement contribution, you'll pay employer FICA taxes on the full $65,000. The employee's income tax withholding will be calculated on $40,000, but that doesn't affect your employer tax obligations. One tip: make sure your payroll system is set up correctly to handle these different tax treatments. I learned this the hard way when I had to file amended returns because my initial setup was wrong. It's worth double-checking with your payroll provider that they're calculating employer taxes on the pre-deduction amounts for retirement contributions. Hope this helps clarify things while you're waiting for your accountant to return!