The tax season is a busy time for everyone, including salaried employees who need to file federal income tax, Medicare Tax, and Social Security tax by the due dates.
This involves dealing with several tax forms, including the W-2 (Wage and Tax Statement), which captures critical information for tax purposes. The form includes several boxes that are lettered and numbered that require to be filled by the employer.
Usually, the employer sends the W-2 form to the employee and the IRS every year-end. The form reveals the employee’s yearly income and taxes withheld from their paycheck from the previous year, including other payroll withholdings. Every employer has to avail the form to their employees by January 31 for efficient tax filing.
The following guide will help an employee be well informed on important details in a W-2 form in time to file their taxes smoothly.
Boxes A to F
These are lettered boxes showing content linked to federal taxes. The information includes the employee’s social security number, name and address of the employee, name and address of the employer, employer identification number (EIN), and ZIP code.
Box 1: Federal Taxable Wages
It shows taxable income, including wages or salary, tips, bonuses, and other taxable compensation. This also includes taxable fringe benefits such as non-cash rewards, gifts, and group term life insurance.
It excludes contributions to the employer’s 401(k), 403(b) annuity, SIMPLE IRA, or 457 government retirement plan and pretax contributions to health insurance.
Boxes 2, 4, 6, 17, and 19: Withheld Taxes
These boxes report all taxes withheld from the paycheck including, federal income tax, Social Security tax, Medicare tax, state income tax, and local income tax.
Important to know: There’s an additional Medicare Tax of 0.9% for employees earning income limits of above $200,000.
Boxes 3 and 5: Social Security Tax and Medicare Taxes
Box 3 reports a portion of an employee’s wages subject to 6.2% social security tax which is up to $142,800 for 2021.
Box 5 shows wages subject to Medicare tax at a rate of 1.45% each from the employer and employee. However, Medicare lacks a wage base limit like social security. This will likely report a larger figure than in boxes 1 or 3.
Boxes 7 and 8: Employee’s Earnings in Tips
Box 7(Social Security tips) shows the amount of tips earned by the employee and reported to the employer. When the amounts in boxes 3 and 7 are added together, they should not exceed the Social Security wage base and be equal to the figure in box 1.
Box 8 (Allocated tips) reports tips allocated to an employee by an employer and is not included in the total income reported in box 1. This happens when an employer operating in a large beverage or food establishment has to assign allocated tips if reported tips by an employee fall below the IRS assigned percentage rate.
Box 10: Dependent Care Benefits
This box is used to report reimbursements for dependent care benefits to the employee, including via a flexible savings account (FSA).
Box 11: Nonqualified Plans
It reveals the amount received by an employee from a nonqualified deferred compensation plan. The amount is already reflected as part of taxable wages in box 1.
Box 12: Deferred Compensation and Other Compensation
The employer is required to fill in forms for deferred compensation, each with a tax code. The employer can fill box 12 with a single or double letter code. It involves reporting on items such as moving expense reimbursements for U.S. armed forces, contributions to the 457 plan, and taxable costs of group life insurance over $50,000. The IRS details the meaning of the code in this pdf.
Box 13
This section has three checkboxes for:
- A statutory employee whose wages are not subject to federal income tax withholding, so Box 2 will be blank. However, the earnings are subject to Medicare and Social Security taxes.
- Retirement plan: The employee needs to be an active participant in an employer-sponsored retirement plan such as a 401(k) in the previous tax year.
- Third-Party Sick Pay: This is if the employee received sick pay under the employer’s third-party insurance policy.
Box 14: Additional Relevant Information
Here, the employer fills out information that doesn’t fit in other sections of the W-2 form. This includes health insurance payments, union dues, and after-tax contributions to a retirement plan.
Box 15: State ID Number
The employer provides the state’s identification number for their business, much like an Employee Identification Number.
Box 16: State Wages, Tips, Etc.
This shows the total wages subject to tax earned by an employee in a state. The amount is similar to what’s reported in box 1.
Important to note: If the employee worked in different states for the same employer, then the taxable income will be reported in separate lines.
Box 18: Local Wages, Tips, Etc.
This is for any income earned by the employee in the business’ locality.
Box 20: Locality Name
This indicates the name of the city or town where taxes are paid.
The Next Step
Being knowledgeable of the details of a W-2 form will ensure an employee is well-equipped to file their federal and income taxes without hassle. As for employers, it’s important to provide the W-2 with accurate and verifiable information to their staff early enough.
Assuming you’ve had employees under your payroll during the year, make sure to keep good time in completing your workers’ W-2 forms to avoid being on the IRS’ radar. You can work with us to help you streamline your payroll responsibilities to prevent any compliance and penalty risk. Please contact us today.
