Kay, a single individual, participates in her employer's SIMPLE § 401(k) plan.The plan permits participants to contribute a percentage of their salary.Kay elects to contribute 5% of her annual salary of $111,000 to the plan.On what amount of her salary does Kay pay income taxes in 2012?

Question

Quizplus · Accepted Answer

Kay's contribution to the SIMPLE § 401(k) plan is made on a pre-tax basis, which means that the amount she contributes is not included in her taxable income for the year.

Therefore, Kay will pay income taxes on her salary minus her contribution to the plan.

$111,000 x 5% = $5,550 contribution to the plan

Taxable income = $111,000 - $5,550 = $105,450

Thus, Kay will pay income taxes on $105,450 in 2012.

Kay, a Single Individual, Participates in Her Employer's SIMPLE §