At first glance, a W-2 looks like a meaningless jumble of numbers and letters. But the form is easier to parse than you think. Here’s an explanation of the most important information for most people who receive a W-2.
Even though W-2s look like an overwhelming jumble of boxes, numbers, and codes, they’re actually one of the simplest tax forms. Once you have your W2 explained, all you’ll need to do is plug the numbers into the right spots on your Form 1040.
1. Oh, thank goodness, I don’t need to add up the numbers on my pay stubs.
Box 1 gives you the most important overall information. It tells you how much you made in total including wages, tips, and any other kind of compensation. You don’t have to add your week-to-week paychecks or do any long calculations. The information is right there.
Instead of adding a string of numbers together, crossing your fingers that the math is right, and plugging the information into your 1040, the W-2 gives you the exact information you’ll write into line 7 of the 1040.
Besides being convenient, the IRS has a reason for this. Since your employer files your W-2 with the IRS, there’s a source that can fact check the income you report. Your reported income needs to be the same as the number on the W-2, or the discrepancies will get you into trouble. Mistakenly writing the wrong number in line 7 of your 1040 is one of the most common W2 mistakes.
Seriously, the majority of the information you’ll need for your 1040 is printed right on the W-2. Unless you had income outside of work (for which you’d receive 1099s), the total wages on your W-2 will be the same as the total income on your 1040.
2. Check out all that sweet, sweet money that’s not in my bank account.
Box 2 tells you how much federal income tax your employer has withheld on your behalf. Before you receive each paycheck, your employer removes a certain percentage to cover your taxes. The total amount of removed money equals the tax you’ve paid this year.
When you file your tax return, you get a good portion of that money back. The amount depends on your unique circumstances, but if you’re eligible for tax exemptions and credits, the overall amount you have to pay will be lower. Whatever amount you’ve overpaid will be returned to you by the IRS. You want to know how much income has been withheld for federal taxes, so the W2 help provides this exact information.
3. My outfit matches Box 1’s, unless some weird circumstances apply.
Box 3 records your social security wages. In most cases, the number will be the same as the one in Box 1. This doesn’t always happen, though.
If you’ve contributed to a 401k retirement plan, there will be a difference in the numbers. To find out whether you did, look for a code D in Box 12. Adding the amount in Box 12 to the amount in Box 1 usually gives you the amount in Box 3.
Because of the way the tax code is written, the numbers are also different for people who made more than $132,900. This threshold is known as the “wage base limit.” After your income reaches this threshold, you don’t have to pay any additional social security tax. Because of this, your Box 3 number will be capped at $132,900, while your Box 1 number will reflect your true total wages.
If you have two jobs with a total combined income of more than $132,900, there’s a neat perk. You can add up your income and receive a refund of the excess Social Security tax that was withheld.
4. More sweet, sweet money that’s not in my bank account: the less-anticipated sequel.
Box 4 tells you how much Social Security tax has been withheld. This tax is different from overall federal taxes. Your employer will base the calculation on whatever the current tax rate is. It’s just simple arithmetic, nothing complicated about it.
While we’re on the subject, Box 5 will let you know your overall Medicare wages and tips, while Box 6 will tell you how much Medicare tax was withheld. The Medicare wages are usually the same as the Box 3 wages, with the addition of tips and money taken out for retirement. The Medicare tax also doesn’t have a cap.
5. All the secret goodies hide in Box 12.
Box 12 is the most complicated box because it houses all the extra exceptions and special circumstances. The IRS explains the different aspects of Box 12 in their filing instructions, but we’ll try to give you a simpler W2 explained. When people end up confused and in need of W2 help, it’s usually related to Box 12.
The Super Secret Box 12 Codes
Okay, so they’re not super secret. They’re printed right on the form instructions. But taxes get a lot more interesting if you pretend they’re full of secret code.
Many people won’t have any information in Box 12. But if you do, it’s important to understand it, as it may be important to your overall tax return. One of the most common W2 mistakes is failing to acknowledge the information in Box 12 on your 1040.
An A means that your tips haven’t been taxed properly for social security. You have to include the correct tax amount in your 1040 by adhering to the 1040’s specific instructions.
Similar to the A, a B code means that you haven’t had Medicare tax withheld from your tips. You’ll need to include the correct tax on your 1040 by following the 1040 instructions.
C indicates the taxable cost of any life insurance policies in excess of $50,000.
This code refers to money you’ve taken out of your income for your 401k retirement plan or other structured retirement plan.
This code indicates deferrals you elected to have taken from your salary as part of a salary reduction agreement.
6. Thank you, W-2, for making e-filing easier!
That sounds sarcastic, but it’s not. Box 15 gives you the important information you need if you’ll be filing electronically. You have access to both your employer’s state ID number and the state the W-2 was issued in.
Meanwhile, Box 16 will explain your state wages. In almost all cases, this number will match the total wages in Box 1.
7. More money that’s not in my bank account: the thrilling, state-based conclusion to the trilogy.
Box 17 is the last one on the W-2. Everything from Box 15 onward deals with state taxes rather than federal ones. The exact amount of taxes you pay will vary widely depending on your state’s unique income tax codes.
Box 17 tells you how much money has been withheld for state income taxes. This information is vital for when you file your state return. Many people stress about the 1040, forgetting that they also need to acknowledge the state taxes they’ve paid.
For the most part, your W-2 just contains the numbers you’ll need to plug into your Form 1040. It makes the process of figuring out your tax return much easier. As long as you understand each part of the form, you can’t go wrong.
By Katherine M.