Understanding the W2

What is a W2?

›Form W2, the Wage and Tax Statement, is the document that shows:

›All of the taxable earnings an employee received during a calendar year

›Taxable earnings are the earnings that are subject to taxes after any pre-tax deductions have been deducted from an employee’s gross pay

›Copies of this document are sent to the employee, who is responsible for filing this document for tax purposes.

 

What are Pre-Tax Deductions?

Section 125 of the IRS code allows employees and employers to take some specific deductions out of an employee’s gross pay BEFORE taxes are calculated. These deductions are:

›Medical            ›Supplemental Life and Disability Insurance

›Dental              ›Flex Spending Deductions

›Vision              ›HSA Deductions

›401k (is a pre-tax deduction for federal and state tax withholding calculations only.)

Federal Income Taxes – All Section 125 deductions come out of an employee’s check BEFORE taxes are calculated.

Social Security and Medicare – Medical, Dental, Vision, Supplemental Life and Disability Insurance, Flex Spending Deductions and HSA Deductions deductions may come out of an employee’s check BEFORE taxes are calculated.

 

Boxes A-E:

Employee and Employer Contact Information 

Box A This box contains the employee’s Social Security number.
Box B

This box contains the Employer’s Identification Number (EIN), also known as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number.

›The EIN is a unique nine-digit number assigned by the IRS.

›Employers with or without employees are assigned an EIN.

›The EIN is used to identify a business by the IRS for tax reporting purposes.

Box C

This box contains the employer’s name, address, and zip code.

›The address may be different from where an employee reports to work.

Box D This box identifies an employee’s unique W2 number in their employer’s payroll system.
Box E

This box shows the employee’s name, address, and zip code.

›It is important to double check that the information is correct.

 

While many of the items listed below don't apply for each and every business, we've provided an explanation of W-2 Earnings Summary below. (Please visit www.irs.gov for a complete listing).

 

Boxes 1-6:

Employee Earnings and Federal Taxes

Box 1

This is all of the employee’s taxable earnings that may be subject to federal, state, or local taxes.

›This includes wages, salaries, tips, bonuses, and commissions.

›Taxable earnings are earnings subject to taxes AFTER all pre- tax deductions have been deducted.

›Federal Income Taxes are calculated on the total earnings AFTER Medical, Dental, Vision, and 401K have been deducted out of an employee’s check.

Box 2

This is the amount of money taken out of an employee’s paycheck to pay the federal income tax.

›The tax rate an employee owes is based on the tax bracket they are in.

Box 3

This is the earnings an employee made throughout the year that was subject to Social Security taxes.

›The wage base is $147,000 for 2022

›Any earnings beyond the wage base limit are not taxed for Social Security.

›The earnings subject to social security are calculated AFTER Medical, Dental, Vision are deducted from an employee’s paycheck.

›Note: Although 401k is a pre tax deduction, it does not apply to Social security calculations

Box 4

The amount of money withheld from an employee’s pay checks for Social Security taxes for the year.

›This will be 6.2% (the Social Security rate) of the amount in Box 3.

Box 5

This is the amount of an employee’s earnings that is subject to Medicare taxes.

›The Medicare wage base is unlimited.

›Note: Although 401(k) is a pre-tax deduction, it does not apply to Medicare calculations.

Box 6

This amount will be 1.45% (the Medicare rate) of the amount in Box 5.

›Note: If the employee earns above $200,000, they pay 2.35% on the wages above $200,000.

›There is no wage limit for Medicare.

 

Boxes 7-14:

Additional Compensation (Boxes 7 - 8 deal with earnings from tips, such as in the restaurant industry.)

Box 7 This is the amount of tips that an employee reported to their employer (from customers).
Box 8

This is the amount of tips an employer attributed to an employee (from the company).

›These tips are considered income.

Box 9 This is an old field that is now defunct.
Box 10

If the employee is part of a dependent care assistance program (DCAP), this box reports the total amount of child or elder care expenses they were reimbursed.

›If the amount the employee received is $5,000 or higher, the value above $5,000 will be reflected in boxes 1, 3, and 5 as earnings.

Box 11

This refers to the money received from an employer’s non-qualified deferred compensation plan or nonqualified savings plan

›Example: A pension plan

›All of this amount is taxable and will already be reflected in Box 1.

Box 12

This box has been appropriately referred to as “the kitchen sink” of the W2.

›This box is where the employer would report the amount that is taxed for various types of contributions, including health and retirement plans.

›Each code has an associated letter:

A. Uncollected social security or RRTA (Railroad Retirement Tax Act) tax on tips

B. Uncollected Medicare tax on tips

C. Taxable cost of group-term life insurance (if over $50,000)

D. Elective deferrals to a section 401(k) cash plan

E. Elective deferrals under a section 403(b) salary reduction agreement

F. Elective deferrals under a section 408(K) (6) salary reduction SEP (Simplified Employee Pension)

G. Elective deferrals and employer contributions to a section 457(B) deferred compensation plan

H. Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan

I. There is no Box 12 code for the letter I

J. Sick pay that is nontaxable

K. 20% excise tax on excess golden parachute payments

L. Substantiated employee business expense reimbursements

M. Uncollected social security on taxable cost of group-term life insurance over $50,000 (for former employees)

N. Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (for former employees)

O. There is no Box 12 code for the letter O

P. Moving expenses paid by an employer directly to an employee (not taxable)

Q. Nontaxable combat pay

R. Employer contributions to an Archer MSA (Medical Savings Account)

S. Employee salary reduction contributions under a section 408(p) SIMPLE (Savings Incentive Match Plan for Employees) plan

T. Adoption benefits

U. There is no Box 12 code for the letter U

V. Income from exercise of nonstatutory stock option(s)

W. Employer contributions to an employee’s HSA (health savings account)

X. There is no Box 12 code for the letter X

Y. Deferrals under a section 409A nonqualified deferred compensation plan

Z. Income under a nonqualified deferred compensation plan that fails to satisfy section 409A

AA. Designated Roth contributions under a section 401(k) plan

BB. Designated Roth contributions under a section 403(b) plan

CC. This code was only for 2010

DD. Cost of employer-sponsored health coverage

EE. Designated Roth contributions under a governmental section 457(b) plan

FF. Permitted benefits under a qualified small employer health reimbursement plan GG. Income from qualified equity grants under section 83(i)

HH. Aggregate deferrals under section 83(i) elections for the calendar year

Box 13

This is subdivided into three separate boxes:

a. The first box will be marked if the employee is a statutory employee.

›A statutory worker is “an independent contractor who is considered an employee for tax withholding purposes [and meets certain criteria].”

b. The second box notes if the employee participated in an employer’s retirement plan.

c. The third box informs the IRS if the employee received any third party sick pay from their insurance policy. (Instead of receiving sick pay directly from the employer as part of a regular paycheck.) Sick pay is not included in taxable wages.

Box 14

›This is the Other Earnings box

›There are a few staples of tax reporting that might appear in this box, including:

a. Union dues

b. Nontaxable income

c. State disability insurance withholdings

d. Deducted health insurance premiums

e. The personal use of a company car

Please visit www.irs.govfor a complete listing. 

Boxes 15-20:

State and Local Taxes

Box 15 State Level -This includes the employer’s state and state identification number.
Box 16 State Level -This shows the amount of wages that will be taxed by the state.
Box 17

State Level -This shows the amount of state taxes that were withheld from an employee’s paycheck during the year.

›Note: If the employee resides in a state without a reporting requirement these boxes will be blank. There are nine states that do not have state income tax. These states are:

›Alaska    ›Florida    ›Nevada    ›New Hampshire    ›South Dakota   

›Texas    ›Washington    ›Wyoming  ›Tennessee

Box 18 Local Level -This shows the wages subject to local taxes.
Box 19 Local Level -This shows any money that has been withheld by a local tax entity.
Box 20

Local Level -This gives the name of the municipality.

›This could be a city, county, municipality, or additional state tax.

 

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