Every direct employee of a company should receive a W-2 form in January. The W-2 is the base document that defines your tax obligations, so it is important that you review and understand yours. However, some people are confused by some of the form's numbers — for example, why the wage listed on a W-2 form does not always match their salary — and simply fill in the information from each box into their tax forms without giving it a thorough review to verify that the information is correct.
Employers can and do make mistakes on W-2s, and these errors can cost you money as well as time and effort to correct downstream tax ramifications. Let's take a look at the W-2 form in a bit more detail.
Understanding Your W-2 Tax Forms
First, verify the pertinent baseline information in the spaces labeled with letters, namely your Social Security number and both addresses (yours and your employer's). Assuming that's correct, look at the block of eight boxes in the upper right-hand corner labeled 1 to 6. Boxes 1, 3, and 5 list the collective income that is used as the baseline to apply different taxes. The amounts of those taxes are placed in the corresponding columns to the right (2, 4, and 6).
It's possible that all three of the income boxes do not match your overall salary, or that the three income boxes do not match each other. That is not unusual at all, and here's why.
First, the amount in box 1 represents your taxable income, which may be lower than your salary. Not all of your salary is necessarily subject to tax right away. If you contributed to a company 401(k) program, that portion of your salary is tax-deferred until the time you draw it out (hopefully at retirement). If it were considered as taxable income now, you would be subject to double taxation.
Similarly, if you have health insurance through your company, your part of the premium is paid using pre-tax dollars and your taxable income is reduced by that amount. Flexible Spending Accounts (FSA's) used for health care costs and transportation reimbursement accounts represent other sources of pre-tax funding that reduce your taxable income. Finally, any non-taxable reimbursements (like mileage costs) that are applied to your paycheck do not show up in your taxable income, since you are being reimbursed for expenses that you paid for with your own post-tax money.
In summary, income in box 1 excludes your elective contributions to retirement plans, pre-tax benefits, or payroll deductions.
Why do boxes 3 and 5 differ from box 1? Because both Social Security and Medicare taxes are calculated differently from federal taxes, and thresholds and limits apply. Income for Social Security purposes includes payroll deductions, but Social Security taxes only apply to the first $132,900 of gross earnings for tax year 2019. Therefore, for low wage earners, box 3 is often higher than box 1, and for high wage earners, box 3 is often lower than box 1.
Income for Medicare taxes (box 5) generally includes taxable benefits and does not include pre-tax deductions, nor does this income have a cap like Social Security. Usually, box 5 is the highest value of the three income boxes.
Tips and allocated tips, respectively found in boxes 7 and 8, are tips that you reported to your employer (like cash tips for servers) and tips the employer allocated to you (like server tips included in the credit card bill). These are considered as part of your taxable wages, so make sure that it is correct — and remember, if you didn't report tips to your employer, you are still obligated to report them to the IRS.
Box 10 includes any benefits paid to you under dependent care assistance below $5,000. That amount is non-taxable. Excess benefits will be lumped into boxes 1, 3, and 5 as taxable income.
Boxes 12 and 13 are a confusing mix of codes that outline other categories of income, benefits, and deductions that are not categorized above. For more details on these codes, see the IRS website.
Box 14 is used to report anything that doesn't fit in any other sections of the W-2, such as health insurance premiums deducted, state disability insurance taxes withheld, non-taxable income, and union dues. Boxes 15 to 20 cover your state and local tax obligations, and the corresponding income values.
What happens if you find a mistake on your W-2? Start by bringing it to the attention of your employer. They should issue you a correct W-2 straightaway. If for some reason they refuse to do so, you can contact the IRS and they will contact the employer on your behalf.
Should your employer fail to get a corrected W-2 to you in time to file your taxes, use substitute Form 4852 in your submission. Form 4852 requires you to estimate the information used in a W-2, but if you have your last pay stub for the tax year, most of the relevant information should be there. Check the IRS website for further details on how to proceed.
Don't just take your W-2s for granted. Take the time to understand them and review them. In the case of an error, you will be very glad that you did.
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