Decoding Your W2 and Other Special Tax Forms

December 4, 2023
Decoding Your W2 and Other Tax Forms

Personal taxes are intimidating. The rules are unnecessarily complex, difficult to understand, and many of them will change before you file your next round of taxes in 2019. However, one document that has stayed fairly consistent, and will most likely continue to do so, is form W2. This form is required by your employers to document your annual wages and taxes from your paychecks. It’s good to understand how your paychecks are reflected in your W2 forms, so in this two-part series, we’re going to take an in-depth look at the information on W2 forms.

Understanding the W2 form and numbered boxes

The first place to start when you receive your W2 is with your personal information. It’s important to make sure that your name and social security number (box a) on the form is correct. Next up…

W2 Forms: Box 1 and Box 2

Box 1 shows your Federal Income Tax Wages for the year, and Box 2 shows the amount withheld from those wages for the year. Based on IRS guidelines, this will include all paycheck dates from January 1st through December 31st of the W2 year. The pay period of the check is unimportant; what matters for W2 forms purposes is the actual check date.

Federal Income Tax wages are determined with each paycheck and are calculated as follows:

  • Start with gross Pay (Including tips and taxable fringe benefits)
  • Subtract: Section 125 deductions (medical, dental, vision, dependent care, pre-tax commuter benefits, etc.)
  • Subtract: deferred income (401k, SIMPLE IRA, 403b, etc.)
  • Equals: Federal Income Tax wages

Should all Deductions Reduce Taxable Income?

Only those deductions specified by the IRS have an impact on taxes. Items such as 401k loan repayments, garnishments, company loan repayments, and union dues won’t reduce your taxable wages.

The IRS Publication 15-B – Fringe Benefits document includes a detailed chart of how specific fringe benefits are treated for tax purposes:

Example:

Bob is paid semi-monthly. On this paycheck, he earned $8,000 in salary. Bob gets a semi-monthly auto allowance of $1,000. He has a medical deduction of $1,500, and he contributes 10% of his income to his 401k. What’s Bob’s taxable income for federal withholding?

*401k is calculated based on the definition of the specific 401k plan. Most plans do not include taxable fringe benefits in the calculation.

W2 Forms: Boxes 3, 4, 5, and 6

Box 3 on the W2 forms represents Social security wages and Box 4 are the social security taxes on those wages. Similarly, Box 5 represents Medicare wages, and Box 6 are the taxes on those Medicare wages.

Social Security and Medicare taxes go hand in hand because the taxable wages for these two taxes are generally the same. The taxable wages for Social Security and Medicare taxes are defined below:

  • Gross Pay (Including tips and taxable fringe benefits)
  • Subtract: Section 125 deductions (medical, dental, vision, dependent care, pre-tax commuter benefits, etc.)
  • Equals: Social Security and Medicare taxable wages

For Social Security and Medicare, deferred income (401k, 403b, Simple IRA’s, etc.) is considered taxable and not subtracted from gross pay.

Example:

Bob is paid semi-monthly. On this paycheck, he earned $8,000 in salary. Bob gets a semi-monthly auto allowance of $1,000. He has a medical deduction of $1,500, and he contributes 10% of his income to his 401k. What is Bob’s taxable income for Social Security and Medicare?

*401k does not reduce gross pay for calculating Social Security and Medicare taxes.

Taxes on Social Security and Medicare Wages

Social Security has a tax rate of 6.2% and Medicare has a tax rate of 1.45%. In the example above, Bob’s Social Security taxes would be calculated as follows, and added to Box 4:

Bob’s Medicare taxes would be calculated as below and added to Box 6:

Social Security Tax Limit

Social Security has an annual limit. In 2017, individuals were taxed only on the first $127,200 of taxable wages, or $7,886.40. In 2018, the wage limit is $128,400. Once you hit the tax limit of $7,960.80, you will no longer be taxed for Social Security in 2018.

Additional Medicare

There are no tax limits for Medicare, and employers are required to withhold Additional Medicare tax of 0.9% once taxable wages are over $200,000 for the year. In the example above, if Bob’s year-to-date taxable wages were $200,000 before payment, his additional Medicare taxes would be calculated as:

The $67.50 amount is added to the Medicare tax withheld in Box 6.

W2 Forms: Boxes 7, 8, and 9

Box 7 applies to employees who receive tips; it’s used to record any reported tips that had unpaid social security taxes.

Box 8 shows allocated tips from large food or beverage establishments. If applicable, the tips are based on allocated tips for an individual derived by Form 8027.

Box 9 is for employers that participate in the IRS’s piloted W2 Verification Initiative. If your employer does not participate, it will be blank. If your employer does participate, it is recommended that taxpayers and tax professionals enter the verification code in Box 9 when prompted by software. Doing so can speed the processing of the return and the issuance of refunds. If one uses an incorrect verification code or leaves it blank, it will not result in a delay in processing the tax return.

So– we survived the first 9 boxes of the W2 forms. Not so bad, right? In my next post, we’ll tackle boxes 11 through 20, and by the end, you’ll be a W2 wiz.

What is tax form 1099-SA?

IRS form 1099-SA reports distributions from health savings accounts (HSAs) and medical savings accounts (MSAs). Distributions are accounted for whether they have been paid directly to the provider or to the account holder in compensation for out-of-pocket medical expenses.

Allowed Medical Expenses

When distributions have been used for allowed medical expenses, no tax penalty is incurred and the amount of distribution is simply recorded. Keeping careful records of HSA fund usage throughout the year can be helpful to ensure that money is spent on qualified charges.

Ineligible Expenses

Occasionally, there may be accidental use of HSA or MSA funds on ineligible expenses. While those expenses may, in fact, be medical in nature, they may not be covered due to specific coverage exclusions. Be sure to check the allowed/disallowed list to use HSA funds appropriately. Funds used on ineligible expenses may incur an income tax penalty.

Final Tip

Proper and thorough documentation of medical expenses is key to successfully filling out IRS form 1099-SA. Be sure to check with a tax professional with any specific concerns or questions.

Form 943 Annual Federal Tax Return for Agricultural Employers

Form 943 is the Employer’s Annual Quarterly Federal Tax Return for Agricultural Employees, which reports annual amounts withheld from agricultural employees and paid by employers for federal income, Social Security, and Medicare.

Who Has to File the Form 5500?

On the first day of their Employee Retirement Income Security Act (ERISA) plan year (which is different than the policy year), if a company had 100 or more participants enrolled in coverage, then they will need to file a Form 5500 for their Health and Welfare Benefit plan. A group health plan with fewer than 100 employees that is either fully-insured or self-funded (or a combination of both) is generally not required to file Form 5500.

Participants include employees, Consolidated Omnibus Budget Reconciliation Act (COBRA) enrollees and retirees, but does not include dependents.

For more information about Form 5500, visit this Department of Labor page.

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