Updated October 24, 2026. Quick answer: Tax Topic 424 is the IRS page on 401(k) plans. It says elective deferrals generally are not subject to income tax withholding when deferred and are left out of box 1 wages on the Form W-2, but they still count as wages for Social Security and Medicare taxes. Distributions received before age 59½ may carry an additional 10% tax unless an exception applies.
Quick reference
| Item | What the IRS topic says |
|---|---|
| What a 401(k) is | “A 401(k) plan is a qualified deferred compensation plan.” |
| Income tax at the time of deferral | “Generally, your deferred compensation (commonly referred to as elective deferrals) isn’t subject to income tax withholding at the time of deferral” |
| Social Security and Medicare | “However, it’s included as wages subject to withholding for Social Security and Medicare taxes.” |
| Where deferrals show on the W-2 | “Your elective deferrals may also be limited based on the terms of your 401(k) plan and are reported as an information item in box 12 of your Form W-2.” |
| Roth option | “Some plans also allow you to elect to make your elective deferrals on an after-tax basis as designated Roth contributions.” |
| Early distributions | “Distributions (including hardship distributions) received before age 59½ are subject to the additional 10% tax unless an exception applies.” |
How elective deferrals are taxed
The topic begins by describing the plan. It says “A 401(k) plan is a qualified deferred compensation plan.” On who can defer, it says “If you’re eligible under the plan, you generally can elect to have your employer contribute a portion of your compensation to the plan on a pretax basis.”
Two separate tax treatments follow. For income tax, the topic says the deferral “isn’t subject to income tax withholding at the time of deferral” and is not reported as wages on Form 1040 because “it isn’t included in box 1 wages on your Form W-2, Wage and Tax Statement.” For payroll taxes the picture changes: “However, it’s included as wages subject to withholding for Social Security and Medicare taxes.”
The employer side has its own line. The topic says “In addition, your employer must report the elective deferrals as wages subject to federal unemployment taxes.” It also notes that “Some plans also allow you to elect to make your elective deferrals on an after-tax basis as designated Roth contributions.”
Limits, reporting and where to read more
On contributions, the topic says “The Internal Revenue Code limits the amount of compensation that an employee may elect to defer in a 401(k) plan.” It adds that the plan’s own terms can lower the amount, and that deferrals are shown in box 12 of the Form W-2. Our page on W-2 box 12 code D covers how that box reads, and 401(k) contribution limits covers the dollar limits.
For further reading the topic says “Refer to Publication 525, Taxable and Nontaxable Income for more information about elective deferrals.” Employers are sent elsewhere: “Employers should refer to Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) for information about setting up and maintaining retirement plans for employees, including 401(k) plans.”
Distributions, hardship withdrawals and the additional tax
The topic says “The plan will specify the form of distribution.” It continues, “Some distributions from a 401(k) plan may qualify for lump-sum distribution treatment or rollover treatment as long as they meet the respective requirements.” It points to Topic no. 412 and Topic no. 413 for those rules.
On hardship withdrawals, the topic says “Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs.” It also says “Since 2019, plans have been able to expand the funds available for hardship distributions.” One limit is stated plainly: “Hardship distributions aren’t treated as eligible rollover distributions.”
The last section covers the extra tax. The topic says “If your 401(k) plan permits you to receive a distribution, the distribution may be subject to an additional 10% tax.” It points to Topic no. 558 for more. Our pages on 401(k) withdrawal rules and early withdrawal penalty exceptions go further.
Where this comes from
This page describes the IRS page titled Topic no. 424, 401(k) plans, as served on irs.gov on October 24, 2026. The IRS page shows that it was last reviewed or updated on 24 Sep 2026. The IRS can change a topic after we read it, and the IRS page controls. General information, not tax or legal advice.
Common mistakes
- Assuming pretax deferrals escape every payroll tax. The topic says deferrals are “included as wages subject to withholding for Social Security and Medicare taxes”
- Looking for the deferral in box 1. The topic says it “isn’t included in box 1 wages” and is shown as an item in box 12.
- Thinking a hardship withdrawal can be rolled over. The topic says “Hardship distributions aren’t treated as eligible rollover distributions.”
- Reading the additional tax as applying only to ordinary withdrawals. The topic says it covers “Distributions (including hardship distributions) received before age 59½”
Related: IRS tax topics by number, 401(k) withdrawal rules, 401(k) contribution limits, W-2 box 12 code D, Early withdrawal penalty exceptions, and Is a pension or annuity eligible for rollover.
Find the right next step for your situation
About how much do you have invested? Pick the range that fits; your next step appears immediately below.
Talk to an advisor about 401(k) planning
For U.S. investors with $250,000 or more in investable assets. WiserAdvisor is an independent service matching you with 2 to 3 vetted advisers. Its form asks for your ZIP code and answers to a few questions; a match is not guaranteed.
Free to request, with no obligation to hire. By submitting, you consent to calls, texts and emails from WiserAdvisor and up to three advisers. Advisers pay for introductions.
Clear Money Guide may earn a referral payment for a qualifying completed form. An introduction is not a Clear Money Guide recommendation.
Opens on WiserAdvisor’s site in a new tab.
Explore advisor help with retirement plan choices
Price the destination before you decide. The matching service below introduces you to advisers who pay to meet you.
Before you start, what actually happens. The form is run by Kapitalwise, our advisor-matching partner. Kapitalwise sends your details to advisers who pay for the introduction, so expect calls and texts. Clear Money Guide may earn a referral payment for a qualifying submitted form, whether or not you ever hire anyone. This is free to you and there is no obligation to hire anyone.
The Kapitalwise form opens here; you stay on this page.
What happens when you press the button
It asks about nine questions: age, investable assets, location; then your name, email and phone number, and verifies the phone by text. Nothing loads and nothing reaches Kapitalwise until you press the button.
Prefer flat-fee or hourly pricing instead? Compare ranges here.
Answer againSources
- IRS, Topic no. 424, 401(k) plans (irs.gov): https://www.irs.gov/taxtopics/tc424
- IRS, Tax topics index (irs.gov): https://www.irs.gov/taxtopics
Read from the IRS pages linked above on October 24, 2026. General information, not tax or legal advice. The IRS topic page and the instructions for your own form control, and your own facts decide the outcome.