When you decide to contribute to a 401(k), one of the first questions that comes up is: How much will this reduce my paycheck? The answer depends on your gross pay, your contribution percentage, and how federal, state, and payroll taxes are applied.
This guide breaks it down step by step with clear examples so you can see exactly how 401(k) deductions affect your take-home pay.
What Is a 401(k) Deduction?
A 401(k) deduction is money set aside from your paycheck before most taxes are applied. By lowering your taxable income, your federal and state tax bills shrink, which means the impact on your paycheck is usually smaller than the amount you contribute.
- Traditional 401(k): Contributions are pre-tax, reducing taxable income now.
- Roth 401(k): Contributions are after-tax, so your paycheck doesn’t shrink before taxes, but withdrawals in retirement are tax-free.
Step-by-Step: How to Calculate a 401(k) Deduction
1. Start With Gross Pay
Gross pay = salary or hourly wage before any deductions.
- Example: $2,000 gross pay per biweekly paycheck.
2. Apply Your Contribution Rate
Multiply gross pay by your chosen contribution percentage.
- If you contribute 6% of $2,000 = $120.
3. Subtract From Gross to Get Taxable Income
$2,000 – $120 = $1,880 taxable income.
4. Apply Federal and State Withholding
Taxes are now calculated on $1,880 instead of $2,000. This means your federal and state income taxes drop slightly.
5. Apply Payroll Taxes (FICA)
Social Security (6.2%) and Medicare (1.45%) are still applied to your gross pay, not your reduced taxable income.
6. Calculate Net Pay
Subtract taxes and other deductions from taxable income to arrive at your final take-home pay.
👉 Want to see the numbers instantly? Try the 401(k) paycheck calculator or explore the net paycheck calculator to estimate your take-home after retirement savings.
Example: $2,000 Biweekly Paycheck With 6% Contribution
| Item | Amount |
|---|---|
| Gross Pay | $2,000 |
| – 401(k) Contribution (6%) | –$120 |
| Taxable Income | $1,880 |
| – Federal Income Tax (est.) | –$180 |
| – State Tax (est.) | –$50 |
| – Social Security (6.2%) | –$124 |
| – Medicare (1.45%) | –$29 |
| Net Pay | $1,497 |
(Actual amounts depend on your W-4, tax bracket, and state rules.
IRS 401(k) Contribution Limits for 2025
- Employee contribution limit: $23,000
- Catch-up contribution (age 50+): $7,500
- Employer match: Does not reduce your paycheck—it’s added on top.
Traditional vs Roth 401(k): Impact on Paycheck
- Traditional 401(k): Lowers taxable income → reduces federal and state tax → smaller tax bill now.
- Roth 401(k): No upfront tax break, so paycheck is reduced by the full contribution. Long-term benefit: tax-free withdrawals.
FAQs: 401(k) Deductions
- Does a 401(k) reduce FICA taxes?
No, Social Security and Medicare are calculated on gross pay. - Can I choose both Roth and Traditional 401(k)?
Yes, if your employer offers both. - How does employer matching work?
Matches don’t come out of your paycheck; they are added directly to your retirement account. - What happens if I max out my contributions?
Contributions stop once you hit the IRS annual limit. - Do 401(k) deductions lower state taxes?
Yes, in states with income tax.
Bettye is the creator of CityPaycheckCalculator.com, a resource designed to help individuals quickly and accurately estimate their take-home pay across U.S. cities. With a strong focus on clarity, accuracy, and user experience, Bettye provides reliable paycheck calculators and helpful insights to support smarter financial decisions. Her mission is to make complex payroll and tax information simple and accessible for everyone.