Your contributions to a 401(k), up to the established limits, come out of your wages before tax withholdings. That reduces your total federal income tax liability in a given year and defers those taxes to when you begin withdrawing money from the 401(k) in retirement. 401(k) contributions do not, however, reduce all of your federal tax liabilities.
Video of the Day
401(k) and FICA
According to the IRS, FICA withholdings consist of two distinct taxes: a Social Security tax and a Medicare tax. 401(k) contributions are not exempt from FICA withholdings. For example, if you make $42,000 in a year and contribute $3,000 to a 401(k), you pay federal income taxes on only $39,000. However, you must still pay FICA withholdings based on your full income of $42,000.