By Kelly Spekelmeyer
Each January, one of the most exciting seasons of the year begins: tax season! Millions of tax forms are distributed to both digital and physical mailboxes across America. Each employee in the workforce receives a form W-2 for wages earned with each employer who paid them during the year. Taxpayers diligently file their taxes each year using this form, but do you and your employees know what is contained in your W-2? Below is a detailed guide to reading and understanding your W-2 form.
Box 1: This box contains the total amount you have earned in taxable wages or other compensation, minus allowable deductions like pre-tax retirement plans. The amount entered into Box 1 includes any income you are paid, less any allowed pre-tax deductions.
Box 2: This is the total federal income tax that has been withheld from your paychecks for the year. Federal income tax withholding is based on the self-reported number of dependents provided on your W-4.
Box 3: The total wages paid (before payroll deductions) that are taxable for Social Security, up to $118,500. This box represents the total wages that are subject to the Social Security tax and include any income earned during the tax year that is not exempt from taxation. Tips are not included in this section. If there are tips taxable for Social Security, they will appear in Box 7.
Box 4: This shows the total Social Security tax withheld from employee paychecks for the year. For 2016, wages up to $118,500 are taxed at a rate of 6.2% for employers and employees and 12.4% for independent contractors. The wages that are included in this number are all earned wages including Social Security tax on tips.
Box 5: The box contains the total wages, including tips and commissions that are taxed for Medicare. Wages and tips subject to Medicare tax are the same as those that are eligible for Social Security taxation, however, unlike Social Security there is no maximum wage and this may be the largest amount on your W-2.
Box 6: The total Medicare tax withheld from employee paychecks for the year. This amount includes the 1.45% Medicare Tax withheld on all Medicare wages and tips shown in Box 5, as well as the 0.9% Additional Medicare Tax on any of those Medicare wages and tips above $200,000.
Box 7: This reflects any tips or commissions that you have declared to your employer.
Box 8: This box is used by food and beverage establishments to indicate the tips allocated to the employee. Businesses in the food industry whose employees receive tips must make sure that the tips meet certain requirements and compensate their employees for the difference if they do not.
Box 9: Contains the Verification Code for the IRS 2016 tax fraud pilot program.
Box 10: This section shows the total dependent benefits paid for by an employer for their employee through a care assistance benefit program. This may include the fair-market-value benefits provided in-kind by the employer or an amount paid directly to a daycare facility or reimbursements to the employee for said care.
Box 11 is used to report amounts which have been distributed to you from your employer’s non-qualified deferred compensation plan (this amount is taxable). This isn’t to be confused with amounts contributed by you. That shows up in box 12.
Box 12: SEE END OF THIS SECTION FOR BREAKDOWN OF SPECIAL CODES FOR BOX 12.
Box 13: This section contains 3 check boxes to indicate whether you are a statutory employee, received third party sick pay, or are a participant in the employer’s retirement plan.
Box 14: This section is used to indicate additional deductions that are not covered elsewhere on the Form W-2. This section often includes information such as union dues, tuition assistance, health-related insurance premiums and also after-tax contributions to retirement plans. Most of these entries are considered nontaxable earned income.
Box 15: The Employers State Tax Identification number is listed here.
Box 16: This section is used to list total wages for the year that are subject to the state income tax. This amount may or may not reflect the same amount as Box 1.
Box 17: The state income tax amount that has been withheld.
Box 18: The total amount of income that qualifies for local taxation. Some localities do not require this information so this box can be empty even if Box 16 has a value.
Box 19: The amount of local tax (if applicable) that is withheld from wages.
Box 20: The code or name of the locality that corresponds to the income and taxation reported in boxes 18 and 19.
Box 12: This contains an amount and a letter code. This area is used to report a variety of benefits and forms of compensation not captured in boxes 1-11. This section will contain an amount and a letter code from A thru Z, and also AA, BB, CC DD and EE. The key to these codes can be found on the back of the Form W-2 and includes such contributions as: employer paid adoption benefits, employer contributions to a health savings account, nontaxable combat pay and nontaxable reimbursements for employee moving expenses just to name a few. Consult the back of the Form W-2 for a full list of descriptions.
A – Uncollected social security or RRTA tax on tips
B – Uncollected Medicare tax on tips (but not Additional Medicare Tax)
C – Taxable cost of group-term life insurance over $50,000 (included in your wages at boxes 1, 3 and 5)
D – Elective deferrals to a section 401(k) cash or deferred arrangement plan (including a SIMPLE 401(k) arrangement)
E – Elective deferrals under a section 403(b) salary reduction agreement
F – Elective deferrals under a section 408(k)(6) salary reduction SEP
G – Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan
H – Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan
J – Nontaxable sick pay
K – 20% excise tax on excess golden parachute payments
L – Substantiated employee business expense reimbursements
M – Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only)
N – Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (but not Additional Medicare Tax)(former employees only)
P – Excludable moving expense reimbursements paid directly to employee
Q – Nontaxable combat pay
R – Employer contributions to an Archer MSA
S – Employee salary reduction contributions under a section 408(p) SIMPLE plan
T – Adoption benefits
V – Income from exercise of nonstatutory stock option(s)
W – Employer contributions (including employee contributions through a cafeteria plan) to an employee’s health savings account (HSA)
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 – HIRE exempt wages and tips (2010 only)
DD – Cost of employer-sponsored health coverage
EE – Designated Roth contributions under a governmental section 457(b) plan