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Effect of 401(k) on taxable income. Say you have an employee who earns $40,000 per year and contributes $4,000 to their 401(K). On their W-2 the box 1 earnings would be only $36,000 which is $40,000 - $4,000 (401(K)). Box 12 would have a D code and show a value of $4,000.

Even if you have too much income for the savers credit your 401(K) contributions are not taxable and basically save you the federal tax on those contributions. You will pay social security and medicaire taxes on the 401(K) contributions however.

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