What Does 414(h) on Your W-2 Mean for Your Taxes?
Decode the specific tax implications of a common W-2 code. Understand how this entry influences your taxable income and contributions.
Tax forms like the W-2 contain various codes and figures that might not be immediately clear. Understanding these references is important for accurately filing your taxes. This article aims to clarify Section 414(h), a common reference found on W-2 forms.
Understanding Section 414(h) on Your W-2
Section 414(h) on your W-2 typically refers to pre-tax contributions made by a public employer on your behalf to a governmental retirement plan. This amount appears in Box 14 of your W-2, often labeled “414(h)”. These are known as “pick-up contributions” under Internal Revenue Code Section 414. Pick-up contributions are unique because, while they are deducted from an employee’s salary, the employer designates them as employer contributions. This recharacterization allows the contributions to be excluded from the employee’s gross income for federal income tax purposes.
How 414(h) Contributions Affect Your Taxes
Contributions made under Section 414(h) reduce your gross income for federal income tax calculations. This pre-tax treatment means you pay less in federal income tax in the year the contributions are made. While many states generally follow this federal income tax exclusion, some states may require these contributions to be added back to your income for state income tax purposes. A distinction of 414(h) contributions is their treatment for Social Security (FICA) and Medicare taxes. Unlike pre-tax contributions to plans such as a 401(k) or 403(b), which typically reduce wages subject to FICA and Medicare, 414(h) contributions generally do not reduce wages subject to these payroll taxes. This means your FICA and Medicare tax withholdings are calculated on your gross wages before the 414(h) reduction.
Common Scenarios for 414(h) Reporting
The appearance of 414(h) on a W-2 is specific to certain types of employment and retirement plans. This code is found on the W-2 forms of public sector employees. This includes individuals working for state, county, and municipal governments, as well as public school teachers and other staff in public education systems. These contributions are typically associated with mandatory governmental pension plans, where participation may be a condition of employment. The specific amount contributed, whether a fixed dollar amount or a percentage of income, is determined by the employer.