How to Read Your Form W-2

BY MAKAYLA FAGEN, CPA

Have you ever looked at your W-2 when preparing your tax return and wondered why none of the boxes match what your salary is? Or were you even confused on how to read the form? Differences between your salary and what is reported on the W-2 are likely due to deduction items that you have requested to be taken out of your paychecks such as retirement, medical and other pre-tax benefits.

But first, you should know that form W-2 boxes 1, 3, 5 and 16 are your wages that are subject to the tax in the corresponding boxes 2, 4, 6 and 17. As we go through this, it may be beneficial to follow along with the 2018 W-2 form, which can be found at https://www.irs.gov/pub/irs-pdf/fw2.pdf. For instance, Box 1 wages are subject to Federal income taxes and Box 3 wages are subject to Social Security taxes, etc. Boxes 2, 4, 6 and 17 are the taxes that were withheld and paid to payroll agencies on these wages throughout the calendar year by your employer. Therefore, your paycheck you receive is less than your gross salary amount. If you did not have any deductions taken out of your paycheck, boxes 1, 3, 5 and 16 would be your gross salary amount.

As previously mentioned, deductions from your paycheck can cause the wage amounts in boxes 1, 3, 5 and 16 to be reduced. If you contribute to a traditional, or pre-tax, retirement plan, the amount you have contributed will be reported in Box 12. The total amount contributed for the year to your traditional retirement plan reduces your wages subject to Federal income tax and state income tax. Therefore, Boxes 1 and 16 will be reduced by your yearly traditional retirement plan contribution, which saves you from paying tax on the reduction in wage amount. If you contribute to a Roth, or after-tax, retirement plan, the amount you have contributed will also be reported in Box 12. However, none of the wage boxes will be reduced for your contribution and this tells the IRS that you were required to pay tax on the wages. That is why when you retire, you will pay taxes on your distributions from the traditional retirement plan and would not pay any taxes on your Roth retirement plan distributions.

The pre-tax and after-tax treatment is similar for medical plans as well. Depending on how your employer’s medical plan is set up, it could be a Section 125 plan and treated as pre-tax or you could be paying for your medical benefits with after-tax wages. Pre-tax medical benefits are not required to be reported on your W-2, like retirement benefits are. But the amount you have paid towards pre-tax medical benefits in the calendar year will reduce the wages in Boxes 1, 3, 5 and 16 and therefore, is not subject to Federal income taxes, Social Security taxes, Medicare taxes or state income taxes.

If you contribute to a dependent care benefit plan, the amount of your deduction ($5,000 for married filing jointly taxpayers and $2,500 for single taxpayers) is pre-tax as well, if it was used to pay for qualified dependent care expenses. The wages in Boxes 1, 3, 5 and 16 will be reduced by the amount in Box 10 and reduce the wages subject to the corresponding taxes.

These pre-tax deduction items that you have taken out of your paycheck can reduce the amount of payroll taxes you are required to pay. This causes the differences in your W-2 wage amounts and your annual salary amount. Hopefully, this is one less IRS form that you are confused by in the future. Please reach out to your accountant if you have any further questions.

Makayla Fagen, CPA | Supervisor
MFagen@MHCScpa.com