What employee taxes must be paid on 401(k) contributions?

When it comes to 401(k) contributions, the key point is that employee contributions are made on a pre-tax basis, meaning they are deducted from the employee's gross income before federal income tax is calculated. However, contributions to a 401(k) plan do not exempt the employee from paying Social Security and Medicare taxes. These taxes are assessed on the employee’s total earnings, including the amounts contributed to the 401(k).

Therefore, while employees do not pay federal income tax on the contributions at the time they are made (instead, taxes will be owed when distributions are taken), they are still responsible for Social Security and Medicare taxes, which fund the federal Social Security and Medicare programs. This is highly relevant for payroll processing, as it directly affects the net take-home pay of the employee and influences the overall payroll tax calculations for the employer as well.

The other options are incorrect in terms of the scope of taxes applicable to 401(k) contributions. While federal income tax is deferred until withdrawal, it does not apply at the time of contribution, making the correct choice focused on the ongoing requirement of Social Security and Medicare taxes.