Social Security Taxes

• The Social Security system that provides payments to senior citizens and the disabled is funded by a payroll tax. You are responsible for paying that payroll tax on the total amount you make, even if you contribute to your company's 401k. The amount you contribute to a 401k is deducted from your federal taxable wages, but not from your Social Security wages.
  
  

Employee and Employer

• The Social Security tax is shared between the employer and the employee, meaning that you pay half of the levy and your employer pays the other half. Normally the rate for both employer and employee is 6.2 percent of wages, but for 2011, only the employee shares has been lowered to 4.2 percent. Your employer is still responsible for paying the full 6.2 percent on your gross pay, regardless of how much you put into your 401k plan.
  
  

W-2 Form

• You can clearly see the impact of your 401k contributions on your taxes and wages when you receive your W-2 form at the beginning of each year. That W-2 lists your wages in a number of areas, including federal taxable wages, Medicare wages and Social Security wages. When you review your W-2, you will see that your gross pay is reflected in your Social Security wages, while your Federal taxable wages are equal to your gross pay minus your 401k contributions.
  
  

Tax Benefits

• Even though participating in your company's 401k does not lower your Social Security levy, there are still significant tax benefits associated with the plan. If you earn a gross income of $40,000 and contribute 25 percent of your wages to your 401k, your federal income taxes are only $30,000. This represents a significant decrease in your taxable wages, and your overall tax liability as well.