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Decoding your W-2

Young woman on floor working on finances
Before you can file your taxes, you need some tax statements. The key among them for most of us is the W-2. Here's a look at all — and there's a lot — that's on this document.

Taxes are all about the numbers. That includes the numerical names of tax documents.

For wage earning taxpayers, the most important form is the W-2 they get early (hopefully!) each year. Officially titled Wage and Tax Statement, it has (true to its name) the details on earnings and taxes paid throughout the past tax year.

This form is starting point in figuring any tax you owe or how much of a refund you get. And if you're a salaried or wage-earning worker, you can't fill out and submit your annual tax return without it.

W-2 why's and when's: W-2s are sent by employers to employees, as well as copied to the Internal Revenue Service and to the Social Security Administration. Employers must mail or hand-deliver Form W-2s for earnings of the previous tax year by Jan. 31.

W-2 forms generally are issued when your earnings are at least $600. But even if you didn't make that much, if your company withheld any income, Social Security or Medicare tax, then it must send you a W-2.

Every employer will send you, if required, a W-2. So if you worked multiple salaried jobs, expect an annual earnings statement from each.

In many cases, it will arrive as the official W-2 document created by the IRS and pictured below.

W-2 Form 2019 tax year version Copy B

However, some companies or the outside payroll services they use create their own substitute W-2 forms. That's fine with the IRS as long as the documents contain all the info that's on official form.

W-2 identification data: The first entries on your W-2 are identifiers, not only of you, but also the company that paid you the wages.

In boxes coded with lower case letters a through f you'll find:

a — Your Social Security number. Make sure this is correct! If not, you need to let your boss know NOW and ask for a corrected earnings statement, known as a W-2c.  
b — The paying company's employer identification number (EIN). This is the business version of our individual Social Security numbers.
c — The payor's name, address and Zip code. This is your company's legal headquarters. It may or may not be where you actually go to work.
d — The control number box is where your company enters this code, if it uses this internal tracking system. In many cases, companies don't bother with this, so this box could be blank.
e — Your name as show on your company's payroll records.
f — Your full address.

Again, if you find an error in these boxes, let your boss know ASAP.

Wide variety of earnings information: For most filers, all that's needed from a W-2 for annual tax filing purposes is all how much was made and how much in income tax was withheld.

But for such a relatively short form, the W-2 is packed with lots of other information.

You'll find on the form, for example, information on workplace benefits. Specifically, it shows if you were reimbursed from your dependent care flexible spending account or, shown as a dollar amount, the value of dependent care services provided by your employer. Amounts under $5,000 are non-taxable benefits.

And if you get gratuities as part of your employment, your W-2 will show the tip income that you reported to your employer throughout the year. In that same earnings area, the form will show any tip income that an employer allocated to employees.

These and other compensation-related amounts, taxable and non-taxable, are detailed on the annual wage statement. On the IRS form, they are shown as boxes and on substitute W-2s usually still called boxes even if they technically are just lines on a printed sheet.

And each version also explains what's in each box via a system of numbers and letters.

You'll find the codes in the fine print on the backs of your W-2 copies or usually a separate page if you get a substitute earnings statement.

If you don't want to dig out the form (and a magnifying glass), here, in a bit bigger typeface, are the box codes and what they mean:

Box 1 — The amount you earned and that you report on Form 1040. For most salaried workers, it's wages. But it's also where any other compensation you may have received, such as taxable fringe benefits, is accounted for. It doesn't, however, include such tax-free things as your pre-tax contributions to retirement plans or other similar workplace benefits

Box 2 — How much in federal income tax that was withheld from your earnings. This is what, on your 1040, that you'll subtract (along with any other tax payments) from your tax amount due to see if you owe more or get back any withholdings as a tax refund. This also is what caused a lot of problems for folks when they filed their taxes for the first year that the Tax Cuts and Jobs Act (TCJA) was in effect. The tax reform law's many changes meant that some folks underwithheld and ended up owing tax at filing time. If that happens this year, or even if you're getting a refund, you should look at fine-tuning your withholding.

Box 3 — Your total wages that were subject to the Social Security tax. This amount takes into account those payroll deductions that weren't part of the Box 1 figure, so for most of us it's likely larger than what's shown in that box. However, if you made a six-figure salary, it could be smaller than Box 1. This is because the Social Security wage base limits the amount of earnings that is subject to the taxes for the retirement benefits. For 2019, that was $132,900. Earnings over that cap are not subject to the Social Security tax.

Social security administration wage base annual increase

Box 4 — Total Social Security taxes withheld for the year. The taxes that fund these future government retirement benefits are calculated at the flat 6.2 percent rate. The amount here, therefore, is 6.2 percent of what's in Box 3. But since there's a Social Security wage cap on this tax, the maximum that should be in this box for 2019 is $8,239.80 (the math is $132,900 x 6.2%).

Box 5 — Medicare is the other component of Federal Insurance Contributions Act (FICA) taxes and the amount of your earnings subject to this tax is shown here. Like its FICA tax partner Social Security, there are no deductions against your Medicare earnings. So all you make is subject to the Medicare tax and is shown here. If you made more than $125,000 as a single filer or $250,000 as a married filing jointly taxpayer, the amount here also might need to be reported on Form 8959, Additional Medicare Tax, to figure the additional 0.9 percent tax due.

Box 6 — This is the dollar amount of Medicare taxes that were withheld from your earnings. Since, unlike Social Security taxes, there's no earnings cap for Medicare taxes so the regular 1.45 percent Medicare tax is calculated on that full amount in Box 5. That amount withheld for the retiree medical coverage is shown in Box 6.

Box 7 — Social Security tips are the gratuities that you — as reminded (shameless plug) in the ol' blogs sidebar Monthly Tax Moves tips — reported around the 10th of each month to your employer. If you didn't do that, then this box will be blank. Note, however, that unreported tips still are taxable income.

Box 8 — This amount is any tips that your boss allocated to you are listed. This amount also is why you need to keep good records of your tips. You must report at least the amount in Box 8 on your tax return unless you can prove that you received a smaller amount. If you have records that show the actual amount of tips you received, report that amount even if it is more or less than the allocated tips. Don't overlook reporting and paying tax on tips. These amounts are credited to your future Social Security benefits.

Box 9 — This box is blank on the 2019 W-2. In prior years, the IRS used it as the place for a verification code that was created to help stem false tax return filings and refund fraud. That pilot program has been discontinued. But when tax law changed to require employers to get information to the IRS sooner (on Jan. 31, the same as the earnings data is due employees), the agency decided the code was no longer necessary.

Box 10 — Here is where you'll find the amount of dependent care benefits (mentioned earlier) that your employer paid to you or incurred on your behalf. This amount is the care benefits total, including those that are more than the $5,000 nontaxable benefits exclusion. Any excess of that exclusion is part of the amounts in Boxes 1, 3 and 5. You could need to complete Form 2441, Child and Dependent Care Expenses, to compute any taxable and nontaxable amounts.

Box 11 — This is the amount you received as a distribution from your employer's non-qualified deferred compensation (NQDC) plan. This is not a qualified plan, such as a 401(k). Generally, an agreement between you and your employer as to when you'll receive compensation at some future time. Through NQDC plans, employers can offer bonuses, salaries and other kinds of compensation. This amount is taxable.

Box 12 — This is the fun W-2 box. It's essentially a catch-all area where a variety of amounts are entered. Because of the many types of income, taxable or otherwise, that can go here, there are four Box 12 sublines, shown as 12a, 12b, 12c and 12d.

We'll come back to what all can go show up in Box 12 in a minute. I promise.

But since there are just a few more numbered boxes, let's finish our look at them.

Box 13 — Here you'll see three small check boxes. Your boss will mark which ones apply to you.

The first one will be checked if you're statutory employee, that is, a worker whose earnings are subject to Social Security and Medicare taxes, but not federal income tax withholding.

The second box reveals whether you participated in your employer's retirement plan during the year. If that box is checked, special limits may apply to the amount of traditional IRA contributions you may deduct. See Pub. 590-A, Contributions to Individual Retirement Arrangements (IRAs).

The third box notes whether you received sick pay under your employer's third-party insurance policy.

Box 14 — Ah, the ever popular "Other" box. Here, employers may report information such as state disability insurance taxes withheld, union dues, uniform payments, health insurance premiums deducted, nontaxable income, educational assistance payments or the parsonage allowance and utilities paid to a clergy member.

In addition, railroad employers use this box to report railroad retirement (RRTA) compensation, Tier 1 tax, Tier 2 tax, Medicare tax and Additional Medicare Tax.

Boxes 15 through 20 — These are the reporting areas in connection with state and local taxes. In these boxes, you'll find state-required information about your employer and the amount of your wages that are subject to your state's and, where applicable, local jurisdiction's taxes. It also shows just how much of those state and local taxes you had withheld.

Box 12 alphabetic explanations: OK, as promised a couple paragraphs earlier, we're back to Box 12 and all the income related amounts that could go here.

In order to differentiate the possible W-2 entries, the IRS has devised an alphabetic code system, this time in capital letters, to explain the amounts in Box 12. They are below, as shown on the IRS form, along with some links to prior blog posts and my notations in italics.

Take a deep breath. There are a lot. A whole lot.

A — Uncollected Social Security or Railroad Retirement (RRTA) tax on tips. Include this tax on Form 1040.

B — Uncollected Medicare tax on tips. Include this tax on Form 1040.

C — Taxable cost of group-term life insurance over $50,000. This is included in boxes 1, 3 (up to the Social Security wage base [which was $ $132,900 in 2019 and $137,700 in 2020]) and 5.

D — Elective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement. This amount is nontaxable.

E — Elective deferrals under a section 403(b) salary reduction agreement. This amount is nontaxable.

F — Elective deferrals under a section 408(k)(6) salary reduction SEP. This amount is nontaxable.

G — Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan. This amount is nontaxable.

H — Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan. See the Form 1040 instructions for how to deduct this amount.

J — Nontaxable sick pay (information only, not included in box 1,3 or 5).

K — 20% excise tax on excess golden parachute payments. If you received an excess parachute payment (EPP), you must pay a 20 percent tax on it. If you received a Form 1099-MISC in connection with the EPP, the tax is 20% of the EPP shown in box 13.

L — Substantiated employee business expense reimbursements (nontaxable).

Stack of documents accessed by woman on a ladderM — Uncollected Social Security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only). See the Form 1040 instructions.

N — Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only). This amount should be included as part of your total tax on Form 1040.

P — Excludable moving expense reimbursements paid directly to a member of the U.S. Armed Forces (not included in box 1, 3, or 5). Note that this now is limited to military personnel relocations.

Q — Nontaxable combat pay. This amount is important when members of the military calculate their potential Earned Income Tax Credit (EITC) amount.

R — Employer contributions to your Archer Medical Savings Account (MSA). Report on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.

S — Employee salary reduction contributions under a section 408(p) SIMPLE plan (not included in box 1).

T — Adoption benefits (not included in box 1). Complete Form 8834, Qualified Adoption Expenses, to compute any taxable and nontaxable amounts.

V — Income from exercise of nonstatutory stock option(s) (included in boxes 1, 3 (up to Social Security wage base), and 5). See Pub. 525, Taxable and Nontaxable Income, for reporting requirements.

W — Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to your health savings account. Report on Form 8889, Health Savings Accounts (HSAs).

Y — Deferrals under a section 409A nonqualified deferred compensation plan.

Z — Income under a nonqualified deferred compensation plan that fails to satisfy section 409A. This amount also is included in box 1. It is subject to an additional 20% tax plus interest. See the Form 1040 instructions.

AA — Roth 401(k) retirement plan contributions. Since these are made with after-tax money, the amount is included in the box 1 wages total.

BB — Roth 403(b) retirement plan contributions for employees of public schools, tax-exempt organizations and certain ministers. Since these are made with after-tax money, the amount is included in the box 1 wages total.

DD — Cost of employer-sponsored health coverage. The amount annotated DD is not taxable.

EE — Designated Roth contributions under a governmental section 457(b) plan. This amount does not apply to contributions under a tax-exempt organization section 457(b) plan. Since these are made with after-tax money, the amount is included in the box 1 wages total.

FF — Permitted benefits under a qualified small employer health reimbursement arrangement

GG — Income from qualified equity grants under section 83(i)

HH — Aggregate deferrals under section 83(i) elections as of the close of the calendar year

Whew! The whole alphabet and then some.

Most popular Box 12 codes: For most of us, the Box 12 codes that matter the most are:

Code D: If you contribute to a 401(k) or other workplace defined contribution plan, the amounts you put into that retirement account last year are indicated by this code. It's a good way to keep track of how much you're contributing at work to your retirement. Even though they aren't taxable, these amounts generally are included in Boxes 3 and 5.

Code DD: This is the amount attributable to another workplace benefit, your employer-sponsored health insurance. This amount is reportable under the Affordable Care Act, often referred to as Obamacare, but as the W-2 notes in bold type, you don't owe tax on it. This amount is just for your information. The only other time you hear about this amount is when your boss explains your raise is lower than you wanted because the company already is paying for a large chunk of your medical coverage.

Code P: This used to be a more widely used code, but it's no longer available to non-military movers. Now only service personnel can get a tax break for relocation expenses.

W-2 copy destinations: We're almost done. I promise (again).

You should get multiple copies of your W-2. They may be all printed on one long form or separate pages.

Here's what the copies mean and what you should do with them.

Copy B is — or was, back in the day when most of us snail mailed paper copies to the IRS — the one that accompanies your Form 1040 that you submit to the IRS. If you use tax software, you'll enter this information (or, if the option is available, upload it) as you use that computer filing method to fill in your 1040.

Copy 1 is for folks in the 43 states and District of Columbia that collect an income tax and require annual return filings to send with their state and/or local tax departments.

Copy C is for your records. The IRS says to hang onto it for at least years after the filing deadline or the date that you actually file if you get an extension. That's the general statute of limitations on how long the IRS has to audit your return.

I say hang onto your copy of each year's W-2 forever, attached either literally by being stapled to your paper copy of your annual tax return or as a digital version in your electronic tax folder. You should keep all your actual returns for always. You can, however, toss supporting documentation after the three-year audit limitation passes.

Keeping a copy of your earnings also could be helpful when you start collecting Social Security. If there's ever a question about your work record or earnings and the amount of the retirement benefits you're due, your old W-2 form should help answer them and make sure you get all you're due.


Tax Forms Tuesday


Thanks for sticking with me on this very long post.
It's the second in Don't Mess With Taxes' new Tax Form Tuesday feature.
I promise, yet again, that future ones won't be this long.

While you can always check the archives for all posts
that mention IRS and other forms, I'm making the tax documents 
highlighted in this new feature a bit easier to find.

They'll be collected on the new Tax Form Tuesday blog page.


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