Decoding Your W2 and Other Special Tax Forms

Taxes can be intimidating. The rules are complex, difficult to understand, and can change. However, to complete your taxes you will need to be familiar with the Form W-2. Employers are required to provide this document to report your annual wages and withholdings from your paychecks. It’s good to understand your Form W-2, so we’re going to take an in-depth look at some of the information on Form W-2.

Understanding the W2 form and numbered boxes

When you receive your Form W-2, we suggest you review your personal information. Make sure that your name (Box e) and social security number (Box a) are correct. Next up…

W2 Forms: Box 1 and Box 2

Box 1 shows your wages, tips, and other compensation for the year, and Box 2 shows the federal income tax withheld during the year. Based on IRS guidelines, this will include all pay received from January 1st through December 31st of the Form W-2 year. The pay period of the check is unimportant; what matters for Form W-2 purposes is the actual paycheck date.

Wages, tips and other compensation typically begins with gross wages (including tips and taxable fringe benefits), but certain deductions like medical, dental, vision, dependent care, pre-tax commuter benefits, and some retirement contributions are excluded from this amount.

However, just because your wages have been reduced, it does not mean your tax liability has been reduced. Items such as 401(k) loan repayments, garnishments, company loan repayments, and union dues won’t reduce your taxable wages.

For more details, you may want to review IRS Publication 15-B – Fringe Benefits.

Example:

Bob is paid semi-monthly. On this paycheck, he earned $8,000 in salary. Bob gets a semi-monthly auto allowance of $1,000. He has a medical deduction of $1,500, and he contributes 10% of his income to his 401k. What’s Bob’s taxable income for federal withholding?

*401k is calculated based on the definition of the specific 401k plan. Most plans do not include taxable fringe benefits in the calculation.

W2 Forms: Boxes 3, 4, 5, and 6

Box 3 on the Form W-2 represents Social Security wages and Box 4 are the Social Security taxes withheld. Similarly, Box 5 represents Medicare wages and tips, and Box 6 are the Medicare taxes withheld.

Generally, Social Security and Medicare taxable wages are the same. Typically, taxable wages for Social Security and Medicare taxable wages begin with gross wages (including tips and taxable fringe benefits), minus deductions like medical, dental, vision, dependent care, pre-tax commuter benefits. Pre-tax deductions for retirement contributions are considered taxable for Social Security and Medicare purposes.

Example:

Bob is paid semi-monthly. On this paycheck, he earned $8,000 in salary. Bob gets a semi-monthly auto allowance of $1,000. He has a medical deduction of $1,500, and he contributes 10% of his income to his 401k. What is Bob’s taxable income for Social Security and Medicare?

*401k does not reduce gross pay for calculating Social Security and Medicare taxes.

Taxes on Social Security and Medicare Wages

Social Security has a tax rate of 6.2% and Medicare has a tax rate of 1.45%. In the example above, Bob’s Social Security taxes would be calculated and added to Box 4. Bob’s Medicare taxes would be calculated and added to Box 6.

Social Security Tax Wage Base Limit

Social Security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for the calendar year. In 2023, individuals were taxed only on the first $160,200 of taxable wages. In 2024, the wage base is $168,600. Once you hit the wage base limit, you will no longer be subjected to Social Security taxes for the calendar year.

Additional Medicare

There is no wage base limit for Medicare tax; however, employers are required to withhold additional Medicare tax of 0.9% on individual wages over $200,000 for the calendar year. In the example above, if Bob’s year-to-date taxable wages were $200,000 before payment, his additional Medicare taxes would be calculated as: $67.50

The $67.50 amount is added to the Medicare tax withheld in Box 6.

W2 Forms: Boxes 7, 8, and 9

Box 7 only applies to employees who receive tips; it’s used to record any reported tips that had unpaid social security taxes.

Box 8 shows allocated tips from large food or beverage establishments. If applicable, the tips are based on allocated tips for an individual derived by Form 8027. These amounts will not be included in boxes 1, 3, 5 or 7.

So– we survived the first 9 boxes of the W2 forms. Not so bad, right?

This communication is for informational purposes only, is not legal, tax or accounting advice, and is not an offer to sell, buy or procure insurance.

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