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Planning for Accuracy

 

The W-2 Form, the form employers are required to send to an employee and the IRS at the end of the year, reports an employee’s annual wages and the amount of taxes withheld from his or her paycheck.

There are several parts to the form, and it is important for employers to understand how to read a W-2 and be able to explain it to employees. (Note, if your company uses independent contractors, the IRS requires a 1099-MISC form instead of a W-2 form for those contractors.)

 

The main concern with W-2 forms is accuracy. Since the IRS uses Social Security numbers to keep track of taxpayers, it is important the Social Security number on the W-2 matches the one on the employee’s tax return, IRS Form 1040. If the wrong Social Security number is on the W-2, the employee cannot change it. Instead, the employer must submit either a corrected W-2 or a W-2c so all affected federal and state agencies receive the correction. In addition, all amounts listed on the W-2 form should be checked and double checked by the employer to ensure they are correct.

 

 

Elements of a W-2 Form

Box a – Employee Social Security Number

Box b – Employer Identification Number (EIN)

Box c – Company Name and Address

Box d – Control Number

Box e – Employee Name

 

Box 1 – Wage, tips, other compensation

This box includes tips and other forms of compensation. It’s the amount on which the employee pays income taxes.

 

Box 2 – Federal income tax withheld 

This is the amount your company has already withheld from an employee and submitted to the IRS. After the employee completes a federal tax form, he or she may get some of this back or may have to pay more.

 

Box 15 – State employer’s State ID #

If you’re in a state with no state income tax, this box may be blank. If the employee worked in two or more states with state income tax, every state should be listed on one or more W-2s.

 

Box 16 – State wages, tips, etc.

This is the employee compensation subject to state income tax. The compensation may be split between states if the employee worked in more than one state or lives and works in different states.

 

Box 17 – State income tax

The amount withheld from wages for state income tax. It has already been submitted to the state and the employee may get some back or may have to pay more tax when the state tax return is filed.

 

Allocated Tips, Earned Income Credit and Dependent Care Benefits

 

Child care benefits, allocated tips and earned income credit require special attention.

 

Box 7 – Social Security Tips

This is the amount of tips your employee reported to you. This amount should be included in the amounts in boxes 1, 3 (up to the current year’s Social Security limit) and 5 and may be included in state and local boxes 16 and 18.

 

Box 8 – Allocated tips

This is the amount of allocated tips. For example, when all the servers at a restaurant do not report enough tips to equal a certain percentage of the sales of the restaurant, the restaurant is required to allocate to each directly-tipped server an amount of tips it is presumed the employee received. Allocated tips are not included in boxes 1, 3, 5 or 7. Box 8 is a memo amount reported to the IRS indicating your employee may have underreported tip income.

 

Box 9 – Advance EIC payment

This box contains any advanced earned income credit payments. The IRS requires a W-5 be on file for each employee each year earned income credit is received.

 

Box 10 – Dependent care benefits

This contains any dependent care benefits your employee received. Any amount over $5,000 is automatically taxable and should also be included in boxes 1, 3, and 5.

 

Medicare Tax, Retirement Plans & Other Information

 

Box 3 – Social Security wages

This box contains the amount of employee compensation subject to Social Security tax. It does not include tips up to the Social Security limit, which are reported in box 7. 

 

Box 4 – Social Security tax withheld

This box contains the Social Security tax withheld from wages (and paid to the IRS) during the year. The amount should be 6.2% of the amount in boxes 3 plus 7.

 

Box 5 – Medicare wages and tips

This box contains the amount of compensation subject to Medicare tax.

 

Box 6 – Medicare tax withheld

This box contains the Medicare tax withheld from wages and paid to the IRS during the year. The amount should be 1.45% of the amount in box 5.

 

Box 11 – Nonqualified plans

This box contains distributions from a nonqualified deferred compensation plan, retirement plan, or deferrals from a prior year now subject to Social Security and Medicare taxes because they are no longer subject to the risk of forfeiture.

 

Boxes 12a-12d – Code

These boxes contain the special information, in code format, that employers are required to tell the government. Codes and amounts for deferred compensation and pension plans are most common and appear as codes D, E, F, G, H or S. Also common is code C for group term life insurance over $50,000 and Code W for Health Savings Account contributions. These amounts are not included in box 1 but are included in boxes 3 and 5. All other codes are explained on the back of the W-2.

 

Box 13 – Statutory employee

This box contains check boxes used to identify whether or not an employee is a statutory employee, an active participant in a retirement plan or received third-party sick pay. The retirement box is automatically checked if the employee contributed to a 401(k) plan, 408(p) SIMPLE plan or 408(k) SEP plan.

 

Box 14 – Other

This box contains any additional information needed. For instance, some states have a requirement for this box, the most common being state disability insurance (SDI).

 

Boxes 18, 19 and 20 – Local wages, tips, etc.; Local income tax; Locality name

These boxes contain local government wage and tax information. If an employee has more than two local jurisdictions, he or she may receive multiple W-2s.

 

Other Helpful Hints

 

The amounts in boxes 3 and 5 are generally the total income for the year less cafeteria 125 and HSA contributions, and qualified transit and parking expenses. These amounts are often different from the amount of taxable income shown in box 1 (and box 16) because of 401(k), 408(p) SIMPLE, 408(k) SEP and other retirement plans.

 

Pay special attention to the amounts in box 12 for retirement plans such as 401(k), 408(p) SIMPLE, 408(k) SEP and other retirement plans. Employees should compare it to their pay stubs or records. Retirement plans are reported with the following codes: D, E, F, G, H or S.

 

There is a rare case where the amount in box 11 is due to a change of status in nonqualified deferred compensation deferrals from a prior year. In that case, the employee may have not had a distribution, but the money has become subject to Social Security and Medicare taxes because it is no longer subject to the risk of forfeiture.

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