Contributions required of the employer are always untaxed; however, the tax treatment of the employee contribution is determined by the employer. WRS accepts contributions as “taxed”, “untaxed”, or a combination of the two; “both”. Participating employers must be consistent with all employees.

The employer must make a decision if the employee’s contributions are to be taxed, untaxed, or both. In order for an employer to report employee contributions as untaxed, the employer must have formal documentation from its governing board stating the employer has elected to “pick-up” the employee portion of the contribution in lieu of contributions from the employee, and the employee does not have the ability to opt out of the election or receive the contributions directly rather than having them paid to WRS. Employers may elect to “pick-up” the employee contribution as untaxed even if the contributions are being paid through a reduction in the employee’s salary.

WRS has available a draft form of resolution for employers to allow the employee portion of the contribution to be reported as untaxed. If WRS does not have this formal documentation from the employer on file, then you will not be able to report your employee contributions as “untaxed”. WRS is required to track whether employee contributions were sent taxed or untaxed.

Taxed: If contributions are deducted from the employee’s check after federal income taxes are computed, the contribution is reported to WRS as taxed. Taxes have been paid on this amount, and federal income taxes will not be due on this amount upon termination or retirement.

Untaxed: Contributions are either paid by the employer, without the employee recognizing any income for the amounts paid by the employer, or contributions are deducted from the employee’s salary and federal income tax is computed on the employee’s salary less the contribution amount. No taxes have been paid on this amount, and federal income taxes will be due on this amount upon termination or retirement. Please be aware if you are a non-state agency, you must have the formal documentation listed above on file with WRS to report contributions as “untaxed”.

Both: A portion of the employee contribution is either taken from the employee’s salary untaxed, or is paid by the employer, without being reported as income to the employee and a portion of the employee contribution is being taken from the employee’s salary after federal income tax has been withheld and is considered income to the employee.

The tax method by which the employee’s contributions were calculated by the employer will determine whether the future retirement benefit received by the employee is taxable or not.

In the majority of cases, employees benefit from untaxed contributions because most employees will be in either the same or a lower tax bracket after retirement.

 The following shows the difference in pay to an employee between taxed contributions and untaxed contributions.

Example of Taxed Contribution paid by employee:

Gross Salary             $1,000.00
Federal Income Tax  $ 120.00
Contributions              $ 82.50
Net Pay                       $ 797.50

Example of Untaxed Contribution paid by employee:

Gross Salary                 $1,000.00
Contributions                  $ 82.50
Adjusted Gross Salary  $ 917.50
Federal Income Tax      $ 110.10
Net Pay                           $ 807.40