Understanding Your Tax Forms: The W-2

Kelly Phillips Erb for Forbes writes:  Each year about this time, mailboxes across America are filled with tax forms. Sometimes, those tax forms go straight to a tax professional, unopened. Other times, taxpayers may dutifully open those forms and type the information, box for box, into tax preparation software. In both cases, it’s not unusual for taxpayers to not have an understanding of the meaning of all of the numbers, letters and other information on those forms. That’s about to change.

This week, I’ll be dissecting some of the most basic tax forms for you. The more you know, the less scary some of these forms can be.

First up, here’s what you should know about the form W-2, Wage and Tax Statement: A form W-2 is issued by an employer to an employee. That carries with it some significance and not only for tax reasons. An employer has certain reporting, withholding and insurance requirements for employees that are a bit different from those owed to an independent contractor.

The threshold for issuing a form W-2 is based on dollars – nothing else matters. Not time worked. Not position held. Just dollars (or dollar equivalents) earned. The magic number is $600. Every employer who pays at least $600 in case (or cash equivalent, including taxable benefits) must issue a form W-2. If any taxes are withheld, including those for Social Security or Medicare, a form W-2 must be issued regardless of how much was paid out to an employee.

An employer prepares six copies of each form W-2 per employee. Yes, that’s a lot of paperwork.

Copy A is transmitted to the Social Security Administration (SSA) along with a form W-3 (the form W-3 reports the total of all of the forms W-2 for the employer). The due date for employers to get that information to SSA is February 28. Copy 1 is issued to any applicable state, city or local tax department. Copy D is retained by the employer.

As an employee, you get three copies of your form W-2. Those three copies must be issued by January 31 of each year. Copy B is for use in reporting your federal income taxes and is generally filed with your federal income tax return (unless you are e-filing in which case you have to provide it to the preparer but it is not usually forwarded to IRS). Copy 2 is for use in reporting your state, city or local income tax and is filed with the relevant taxing authorities. Copy C is for your records (you should retain Copy C for at least three years after you file or the due date of your return, whichever is later).

The left side of the form is for reporting taxpayer information; the right side of the form is used to report financials and codes. The bottom of the form reports local and state tax information.

Here’s a closer look at each of the boxes on the left:

Box a. Your Social Security Number (SSN) is reported in box (a). You should always double-check this to make sure it’s correct. If it’s not correct, you need to request a new form W-2 from your employer. An error could slow the processing of your return.

Box b. Your employer’s EIN is reported in box (b). An EIN is more or less the employer’s equivalent of your SSN.

Box c. Your employer’s address is reported in box (c). This is the legal address of your employer which may or may not be where you actually work. Don’t let that throw you.

Box d. The control number is an internal number used by your employer or your employer’s payroll department. If your employer doesn’t use control numbers, box (d) will be blank.

Boxes e and f. These appear as one big block on your form W-2. Your full name is reported at box (e). It’s supposed to reflect the name that’s actually on your Social Security card (the SSA isn’t crazy about suffixes, even if you use them, so you shouldn’t see one on your form W-2 unless it’s on your Social Security card). If your name isn’t exactly as it appears on your Social Security card, you may need a new form W-2; ask your employer if you’re not sure. Your address is reported at box (f) and should reflect your mailing address – which could be a post office box – likely without punctuation (a USPS preference). If your address on the form W-2 isn’t correct, notify your employer: you won’t need a new form W-2 but your employer needs to update his or her records.

The boxes you care most about are those boxes (a), (e) and (f), as highlighted by the pink circles:

Now, here’s a closer look at the boxes on the right:

Box 1 shows your total taxable wages, tips, prizes and other compensation, as well as any taxable fringe benefits. It does not include elective deferrals to retirement plans, pretax benefits or payroll deductions. Since the figure (highlighted by the red arrow in my example below) doesn’t include those amounts, it’s not unusual for this amount to be less than the amounts included at boxes 2 and 3. It’s the number most taxpayers care about the most.

Box 2 reports the total amount of federal income taxes withheld from your pay during the year. This amount (highlighted by the purple arrow in my example below) is determined by the elections on your form W-4 based on exemptions and any additional withholding. If you find that this number is too low or too high, you’ll want to make an adjustment on your form W-4 for the next year.

Box 3 shows your total wages subject to the Social Security tax. This figure is calculated before any payroll deductions which means that the amount in box 3 could be higher than the number reported in box 1, as in my example. It could also be less than the amount in box 1, if you’re a high-wage earner, since the total of boxes 3 and 7 (see below) cannot exceed the maximum Social Security wage base. For 2013, that amount was $113,700. If you have more than one job, for Social Security tax purposes, the cap still applies.

Box 4 shows the total of Social Security taxes withheld for the year. Unlike federal income taxes, Social Security taxes are calculated based on a flat rate. The rate is 6.2%. The amount in Box 4 should, then, be equal to the amount in box 3 times 6.2%. Since you should not have more Social Security withholding than the maximum wage base times 6.2%, the amount in box 4 should not exceed $7,049.40. In my example, the figure is $50,000 x .062, or $3,100.00.

Box 5 indicates wages subject to Medicare taxes. Medicare taxes generally do not include any pretax deductions and will include most taxable benefits. That, combined with the fact that unlike Social Security wages, there is no cap for Medicare taxes, means that the figure in box 5 may be larger than the amounts shown in box 1 or box 3. In fact, it’s likely the largest number on your form W-2.

Box 6 shows the amount of Medicare taxes withheld for the year. Like Social Security taxes, Medicare taxes are figured based on a flat rate. Therate is 1.45%. For most taxpayers, this means that the figure in box 6 is equal to the figure in box 5 times 1.45% (as in my example indicated by the green arrow since $50,000 x 1.45% = $725). However, under a new law that kicked in beginning in 2013, an employer must withhold additional Medicare tax of .9% from wages paid to an individual earning more than $200,000, regardless of filing status or wages paid by another employer. Since your employer doesn’t know your entire financial picture, it’s possible under the new law that you may have to pay more additional Medicare taxes than your withholding depending on filing status, compensation and self-employment income.

Tips which were reported to your employer will be found in box 7. If this box is blank, it means that you did not report tips to your employer (this doesn’t mean that you don’t have to report those tips to IRS).

Allocated tips reported in box 8 are those that your employer has figured are attributable to you. Those tips are considered income to you.

There won’t be anything in box 9. The reporting requirement for that box expired a few years ago and the box hasn’t yet been removed from the form (go figure).

At box 10, your employer will report the total of any benefits paid on your behalf under a dependent care assistance program. Amounts paid out under a qualified plan which are less than $5,000 are considered non-taxable benefits. That number will include report the value of all dependent care benefits, including those greater than the $5,000 exclusion (if the value exceeds $5,000, that excess will be reported in boxes 1, 3 and 5).

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 byyou. That shows up in box 12.

Box 12 is the kitchen sink of form W-2 reporting. Here, you’ll see all kinds of codes. Not all of the income coded at box 12 is taxable. Here’s aquick rundown of the codes:

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

In the sample form W-2, I’ve included three of the most popular codes.

Elective deferrals (Code D) are extremely popular. As noted above, these amounts will generally be included at box 3 and box 5 even if they are excluded from wages at box 1.

The cost of employer-sponsored health coverage is reported using Code DD. This amount is reportable under the Affordable Care Act but it is not taxable to you.

Excludable moving expenses (Code P) for qualified costs are an example of benefits which will be reported by your employer but are not taxable to you. If reimbursements are non-qualified, they will be reported as income to you in boxes 1, 3, and 5.

Box 13 really isn’t one box: it’s a series of three boxes. Your employer will check the applicable box if you are a statutory employee (employees whose earnings are subject to Social Security and Medicare taxes but not federal income tax withholding); if you participated in your employer’s retirement plan during the year; or if you received sick pay under your employer’s third-party insurance policy.

Box 14 is a “catch all” box. Your employer reports anything here that doesn’t fit anywhere else on the form W-2. Examples include state disability insurance taxes withheld, union dues, health insurance premiums deducted and nontaxable income.

Your state and local tax reporting can be found at the very bottom of the form W-2.

Box 15 is very straightforward and includes your employer’s state and state tax identification number. If you work in a state without a reporting requirement, this box (along with boxes 16 and 17) will be blank. If you had multiple withholdings in a number of states, more than one box will be filled.

If you are subject to state taxes, box 16 will indicate the total amount of taxable wages for state tax purposes.

If you have wages reported in box 16, box 17 will show the total amount of state income taxes withheld during the year. If you live in a state that has a flat state tax (like PA), you can double check to make sure that your withholding is correct by multiplying the amount in box 16 by the flat tax rate.

If you are subject to local, city, or other state income taxes, those will be reported in box 18. If you have wages subject to withholding in more than two states or localities, your employer will furnish an additional form W-2.

If you have wages in box 18 subject to local, city, or other state income taxes, any amount of withholding will be reported at box 19.

Box 20 is exactly what you’d expect: the name of the local, city, or other state tax being reported at box 19.

You should have received your form W-2 – with all of this information properly reported – by January 31, 2014. If you didn’t, you’ll want to contact your employer and possibly take more action.

For more details on other tax forms, like the forms 1098 and 1099, check out the rest of the series this week.