Form W-2 Explained: Boxes 1-10

 

The W-2 is a document that your employer has to furnish to their employee(s) by the 31st of January for the prior tax year. The IRS and the State/City, as well as you, the taxpayer will all receive a copy. The taxing authorities will match the information sent in by you via the tax return to all the information provided by your employer(s). If there are any mismatches, depending on the error, it can automatically trigger either initial rejection of your tax return as it is transmitted electronically, or it can trigger a correspondence audit. The results vary on circumstances. 

As a working individual, you earn income that is subject to taxes on multiple levels:

Federal

Social Security and Medicare (Payroll Taxes)

State

City/Local

The amount of income taxes (not payroll) that were withheld throughout the year depend on how you filled out the federal form W-4 and a corresponding form for the state (NYS uses form IT-2104, each state has a different form), when you commenced work for your employer. The more exemptions you claimed, the less tax was withheld for federal and state income tax purposes.

From a federal tax perspective (state works in a similar manner), exemptions simply reduce your taxable income. The actual number changes each year, and is indexed for inflation. In 2009 and 2010 each exemption is worth $3,650. Exemptions simply reduce how much taxes you will need to pay during the year from your paycheck.

For example:

If you have 4 people in your family, a husband and wife with two children, the total amount that you would be able to deduct from your AGI (Adjusted Gross Income) would be $14,600 ($3,650*4). Hence, if your AGI was $60,000, this would bring your taxable income down to $45,400 ($60,000-$14,600).

Federal Tax Return 20XX	Amount
Gross Income from All Sources	$70,000
Adjustments to Income (i.e. IRA contribution)	-$10,000
Adjusted Gross Income	$60,000
Less Exemptions $3,650*4	-$14,600
Taxable Income Before Itemized Deductions	$45,400

Box 1: Wages, Tips, and other compensation. This is the income you have earned up thru December 31 of the prior year. This is the amount that is subject to the federal (IRS), as well as state (not allways at 100%) and possibly city (depending on where you reside) income tax.

Box 2: Federal Income Tax Withheld. This is the amount that was withheld by your employer from each pay check; and your employer remitted these amounts over to the IRS on your behalf through-out the prior year.

Box 5: Medicare Wages. As with Box 3, this is income that is subject to the Medicare tax (payroll tax). The current rate for 2009 is 1.45% (.0145). However, there is no cap, and all income earned is taxable. So if you made $600,000, your tax would be $8,700 ($600,000*.0145). The amounts here usually equal Box 1 of your W-2. If the amount here is not equal to Box 1, and the amount in Box 5 is greater than the amount in Box 1, this simply means that what was not subject to taxation in Box 1 is subject to taxation in Box 5 for two different levels of taxes. Whereas, for federal tax purpose items such as 401K contributions and certain fringe benefits are excluded from federal taxable income, they are not excluded for payroll taxes.

Box 6: Medicare Tax Withheld. This is the amount that was withheld by your employer out of each pay check, and your employer remitted these amounts over to the Social Security Administration on your behalf through-out the prior year.

Box 7: Social Security Tips. This is the amount that you reported to your employer as tip income. Normally, a cash basis tax payer includes income when received. However, tips are specially treated. An employee who receives $20 or more in tips in a month (as a result of working for one employer and not combined from several jobs) must report the total tips to the employer by the 10th day of the next month [Sec. 6053 (a)].  These tips are treated as paid when the report is made to the employer [Sec. 451 (c)].  For example, if you received tips totaling $2,000 in December of Year 1. On January 5, year 2, you reported this tip income to your employer in the required written statement. You would report the $2,000 in year 2, not year 1.

Box 8: Allocated Tips. This is the amount of tips that your employer calculated and allocated to you, because you did not report this amount to your employer accordingly. This is a separate amount, and is not included in Boxes, 1, 3, 5, or 7. Instead, you report this amount as taxable wages on your federal form 1040 line 7 (for 2009). You must then use form 4137, to calculate and pay additional payroll taxes that were not withheld and remitted over to the Social Security Administration by your employer.

Box 9: Advance EIC (Earned Income Credit). There are basically two types of credits you may receive as a taxpayer against income tax already due. There are refundable credits, and there are non-refundable credits. If on your income tax return your federal tax is calculated, and the amount arrives to $2,000. If you have a $3,000 refundable credit, the difference is returned to you via check or direct deposit. A non refundable credit would just reduce your tax due to $0; the excess may or may not be carried forward, depending on the type of credit. The EIC is a credit that is given out by the government to help people who are in the lower income levels. You must have earned income in order to receive this credit, and pass other restrictions in order to qualify. Advance EIC is the amount that your employer pays you in advance from this credit throughout the year if you submitted form W-5 to the IRS. The amounts you received from your employer throughout the year will go against the amount you may claim on your tax return.

Box 10: Dependent Care Benefits. This is the amount that your employer reimbursed you for dependent care expenses, or it is the fair market value of dependent care services provided by your employer in designated facilities (ex: on sight daycare or offsite daycare). Amounts under $5,000 are considered non-taxable fringe benefits, and are excluded from wages subject to taxation in Boxes 1, 3, and 5. Hence, they are not subject to federal and payroll taxes. If you will claim the Dependent Care Credit on your tax return (federal form 2441), you must exclude the amount of reimbursements from total expenses claimed. For example, if your employer reimbursed you $2,500, and you spent an additional $500 for dependent care services (such as daycare), you may only claim $500 as your care expenses, on your federal and state tax returns.

Form W-2 Explained: Boxes 11-20

February 3, 2010

Freyman & Freyman, LLC

Form W-2 Explained: Boxes 11-20

Introduction:

So far we have covered the Federal and Payroll level of taxation on wages earned. Now let’s look at the lower tiered section of your W-2, what I call the State/City and miscellaneous sections of your W-2.

This segment is dedicated to understanding the difference between Federal and the State/City taxation as well as the correct reporting of income. We will also touch on multi-state taxation and allocations. Additionally, we will discuss the types of employment and compensation.

Concepts:

To understand the boxes noted bellow the following concepts must be read and understood:

Who is liable for payroll taxes?

As an employee, you and your employer, both pay the Social Security and Medicare (payroll) taxes. As mentioned earlier, Social Security is 6.2% (.062) and Medicare is 1.45% (.0145). So between the employer and the employee (social security is 4.2% for 2011), the sum total is 15.3%, or 7.65% each. As an independent contractor, you are considered self-employed for income tax purposes, and as such, you are required to pay for your share of payroll taxes as an employer and as an employee. This additional tax is called the Self-Employment Tax, and is reported and calculated on Federal Form 1040 (Schedule SE). However, the government does give you some sort of break, as you are allowed a deduction of ½ of the “self-employment tax”, on your federal form 1040 (line 27 for 2009). An additional break is that the self employment tax is based on 92.35% of your net income from business (net-self employment income), so if the tax comes out to be less than $400, there is no need to file and pay self-employment forms and taxes.

Types of Employment:

Common-Law Employees:

In short, this simply means you are a full time worker in a business, and the boss has full control of your daily routine tasks. You will receive a W-2 for wages earned, and all of the relevant taxes were withheld from your gross wages and remitted over to the taxing authorities.

Independent Contractor:

As an independent contractor, you are considered a self-employed individual and as such you are responsible for making tax payments on a quarterly or on an annual basis for all levels of taxation: Federal, Payroll, State, and City. An independent contractor reports items of income and expenses on Federal Form 1040 (Schedule C). Additionally, there is no employer/employee relationship between the two contracting parties. Hence, the contract(or) bears no liability for the contract(ee)’s negligent and or fraudulent acts that may bring suit against the contractor.

Statutory Employee:

This category of employment is considered a hybrid, whereas, the statutory employee is neither considered a common law employee nor an independent contractor. The only tax withheld by the employer here is the Social Security and Medicare (payroll) taxes. The income is not reported on form 1040 line 7, however it is reported on Form 1040 (Schedule C – Profit or Loss from Business), much like an independent contractor. However, as opposed to the independent contractor, the statutory employee does not pay the employers share of the payroll taxes or file Schedule SE, as they have already been withheld and paid for.

Some examples of Statutory Employees:

A full-time traveling or city salesperson

A full-time life insurance sales agent whose principal business activity is selling life insurance

A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products

If you would like to read in more detail, here is a resource from the IRS’s website, called Publication 15:

http://www.irs.gov/businesses/small/article/0,,id=179112,00.html

What constitutes income for Federal and State Tax purposes?

The IRC code defines gross income as all income from whatever source derived except as provided otherwise. Sec. 61(a) enumerates types of income that constitutes gross income. The list is not all exhaustive:

1.       Compensation for services, including fees, commissions, and fringe benefits

2.       Gross income derived from business

3.       Gains derived from dealings in property

4.       Interest

5.       Rents

6.       Royalties

7.       Dividends

8.       Alimony and separate maintenance payments

9.       Annuities

10.   Income from life insurance and endowment contracts

11.   Pensions

12.   Income from discharge of indebtedness

13.   Distributive share of partnership gross income

14.   Income in respect to a decedent

15.   Income from an interest in a n estate or trust

W-2 Boxes 11-20

Box 11: Non Qualified Plans. The contributions made to these plans are usually nondeductible to the employer, and are usually taxable to the employee as well. However, they allow employees to defer taxes until retirement, when they are presumably in a lower tax bracket. If your employer provides you with non-qualified deferred compensation or you participate in a government Section 457 plan, and your employer distributes this compensation, it becomes taxable on all tax levels upon distribution of such funds. This amount is already included in box 1, 3, 5, 16, and 18.

Box 12: Deferred Compensation and other Compensation. Deferred compensation plans are employee benefit plans, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan.

Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax withholding but are not exempt from payroll taxes. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings accumulate tax free until distributed to the employee at retirement.

Box 12 will report either a single letter or a double letter code followed by the amount of the contribution made for the prior tax year. If there was no other factor at play besides your contribution to a deferred plan, the difference between the wages in Box 1 (a less amount) and the wages in Boxes 3 and 5 (possibly Box 16 and 18 for state), should be the amount in Box 12. This is because contributions made to defer compensation will be taxed when withdrawn at retirement. However, the contributions are still currently subject to payroll taxes.

Other compensation includes reimbursements from your employer under a “non-accountable plan” for either business expenses incurred while on business on behalf of your employer, or for reimbursements for business related moving expenses.

 Here are the codes:

A - Uncollected Social Security or RRTA Tax On Tips

B - Uncollected Medicare Tax On Tips

C - Group Term Life Insurance Over $50,000

D - Elective deferrals to 401 (k) Plan

E - Elective deferrals to 403 (b) Plan

F - Elective deferrals to 408 (k) Plan

G - Elective deferrals to 457 (b) Plan

H - Deferral To 501 (c) (18) (D) Plan

J - Nontaxable Sick Pay

K - 20% Excise Tax - Golden Parachute

L - Substantiated Employee Business Expense Reimbursement

M - Uncollected Social Security Or RRTA Tax On Group Term Life Insurance

N - Uncollected Medicare Tax On Group Term Life Insurance

P - Excludable reimbursement Moving Expenses

Q - Nontaxable Combat Pay

R - Employer Contribution To Archer MSA

S - Contributions To 408 (p) Simple Plan

T - Employer Provided Adoption Benefits

W - Employer Contribution To Health Savings Account

Y - Deferrals Under Section 409A

Z - Income Under Section 409A Or A Nonqualified Deferral Comp Plan

AA -Designated Roth Contributions Under A 401 (k) Plan

BB -Designated Roth Contributions Under A 403 (b) Plan

Box 13: Check the Box: depending on your classification of employment or if you participate in a retirement plan, one of the following boxes may be checked.

Statutory Employee: As discussed earlier, if you are a statutory employee, this box will be checked, and you will report these wages on Federal Form 1040 (Schedule C). If you have additional wages or income from business, those additional amounts will be reported on a separate Schedule C, or Line 7 of form 1040.

Retirement plan: If this box is checked, this means that you participate in an employer sponsored retirement plan (see codes for Box 12 for examples of various types of plans). This box is for the tax software to be able to calculate the amount of any additional retirement contributions you may be able to claim and deduct on your Federal Form 1040 Line 32 for the prior tax year. These are typically Traditional or Roth IRA’s. The amount you may be eligible to deduct for additional contributions to an IRA depend on whether or not you or your spouse already contribute to a retirement plan at work, employment, income limits, age, and other factors.

Third Party Sick Pay: These are lost wages that are paid to the employee by a third party insurer in case of illness/ and or disability of that employee(s). These wages are excluded from Federal, State and Local taxes, but are still subject to payroll taxes.

Box 14: Other Tax information: This box reports additional information, such as union dues, employer-paid tuition assistance, health insurance premiums you paid, after-tax contributions you made to a retirement plan. Most common is state and local miscellaneous taxes and disability insurance payments made by you and deducted from each pay check.

California SDI Tax

CA UPDI Tax

NJ SDI Tax

NY Non-occupational Disability Fund Tax

PA Unemployment Tax

RITDI Tax

WA Workers Compensation Fund Tax

MV Unemployment Fund Tax

AK Unemployment Fund Tax

Other Mandatory Deductible State or Local Tax Not On Above List

Wages For SDI, VPDI, TDI, UI, etc.

Charitable Cash Contribution

Deductible Employee Expenses

Kansas Public Employees Retirement

Maine ST pickup

NY IRC 125/Sec 18 NY Tax Exempt

NY IRC 414(h) Subject To NY Tax

NY IRC 414(h) NY Tax Exempt

Railroad Retirement Tier 1 Wages

Railroad Retirement Tier 2 Wages

Railroad Retirement Tier 1 Tax

Railroad Retirement Tier 2 Tax

RRTA Tips

Code U,V,W,X,Y, Or Z

Other - Not On Above List

Concepts to understand:

Multi state taxation:

You generally are required to pay taxes in the state that you earn income in and in addition to your resident state. If you commute from New Jersey to New York City to work, you will have to pay taxes to both states on the same amount of income.

How does this work, and how is this tax burden alleviated to the taxpayer by the taxing authorities?

The answer is really not as simple. States have agreements amongst themselves called State Tax Reciprocal Agreements amongst themselves. Out of the 47 states that impose an income tax, currently only 20 have reciprocal agreements.

What is a State Tax Reciprocal Agreement and how does it affect my taxes?

Your home state will give you a credit for taxes paid to another state taxing authority on your resident state tax return. The issue here is that most of the time the credit is less than the taxes paid to the other state, so there is a certain level of double taxation. This is also referred to as the Jock tax. Most entertainment industry people, that travel for work, such as professional athletes, will have to pay taxes to each state they play in, in addition to the their home state, that is why many professional athletes tend to live in tax free states such as Florida.

Box 15: State and State Employer’s Identification: This box indicates your employer’s state tax ID number. In most cases this number is the same as the federal ID number (or employer identification number (EIN)). However, if you worked in multiple states for the same employers, there may be multiple lines of ID numbers. This line tells the tax software to which state to allocate the wages to.

Box 16: State Wages: This is the amount of wages subject to state income tax. Box 15 indicates what state is entitled to collect tax on the wages in this box.

Box 17: State Income Tax Withheld: This is the amount that was withheld by your employer out of each pay check, and your employer remitted these amounts over to the State taxing authorities on your behalf through-out the prior year.

Box 18: Local Wages: This is the amount of wages subject to local income tax. Box 20 indicates what locality is entitled to collect tax on the wages in this box. Some states have localities while others don’t. If you live in NYC, you will owe NYC taxes, however, if you live in Long Island, or New Jersey, there is no local tax, but there may be higher property taxes.

Box 19: Local Income Tax Withheld: This is the amount that was withheld by your employer out of each pay check, and your employer remitted these amounts over to the State/Local taxing authorities on your behalf through-out the prior year.

Box 20: Locality Name: Box 20 provides a brief description of the local, city, or state tax being paid. The description may identify a particular city, or may identify a state tax such as State Disability Insurance (SDI) payments.

New MTA Tax for Self-Employed Individuals

Freyman & Freyman Tax Corner

January 28, 2010

New MTA Tax for Self-Employed Individuals

In May 2009, New York State enacted the Metropolitan Commuter Transportation Mobility Tax (Commuter Tax) to fund the Metropolitan Transportation Authority and reduce fare hikes and service cuts. This new tax is imposed on certain employers and self-employed individuals (including partners in partnerships, and LLC members) who engage in income producing activities within the Metropolitan Commuter Transportation District (District). Employers who engage a payroll service provider for their regular payroll processing will have the tax computed and withheld. The payroll service will then remit the payment over to the Commissioner of Taxation and Finance. All other self-employed individuals (including partners and members of LLCs and LLPs) must compute and remit tax on their own.

Tax rate for self-employed individuals:

The tax rate is 0.34% (.0034) of the net earnings from self-employment. You may use federal Schedule SE (Form 1040) as a guide in calculating your estimated net earnings from self-employment (or see our SE Tax Spreadsheet in Excel Corner.

The amount of income that is subject to the tax:

The tax is computed on net earnings from self-employment, which is earned while working within the District, if this income exceeds $10,000 for any given tax year. Any income subject to federal self-employment taxes will be subject to this tax. Taxpayers who conduct business activity outside of the District must determine what portion of their self-employment income, if any, is earned within the District.

The Metropolitan Commuter Transportation District (District) defined:

The District includes all five boroughs of New York City, and the counties of Nassau, Rockland, Suffolk, Orange, Putnam, Dutchess and Westchester.

Effective date of the Commuter Tax:

The tax is effective March 1, 2009. For 2009 only, the tax is based on ten-twelfths of net earnings for the whole year (this eliminates the need to identify income earned before and after the March 1 date.)

Payment frequency:

Self-employed individuals must make quarterly estimated payments, and file an annual return for the Commuter tax by April 30th of each calendar year. Estimated payments must be made on or before April 30th, July 31st and October 31st of the current year, and January 31st of the following year. Estimated tax payments are required even if the projected tax is small (there is no de minimus exception), but estimates can be prepaid. Estimated tax payments for the Commuter Tax are separate from estimated personal income tax payments, and cannot be combined.

Payments due dates:

The first payment required for 2009 is due November 2, 2009. This required payment is equal to 75% of the total 2009 estimated tax. The following payment is due February 1, 2010.

Forms that must be filed quarterly and annually:

Estimated payments can be made by check or money order and filed with Form MTA-5 (Estimated Metropolitan Commuter Transportation Mobility Tax Payment Voucher). Any balance due with the annual filing can be made by check or money order and filed with Form MTA-6 (Metropolitan Commuter Transportation Mobility Tax Return).
Alternately, filings can be made online through New York State’s Online Tax Center at http://www.nystax.org/. There will be a six-month extension available for the annual filing via Form MTA-7 (extensions due not extend time to pay any tax due, only the time file). Currently New York State has not yet finalized these forms or their instructions.

Partner requirements:

Partners in a partnership (or members in an LLC treated as partnerships) are subject to the tax based on their share of the partnership net earnings from self-employment allocated to the District. Partnerships must provide to the partners all the information necessary for the partners to compute and remit the correct amount of MCTMT.

Group filing for partnerships:

As an alternative to each partner making estimated Commuter Tax payments and filing separate returns, a qualifying partnership may file a consolidated group return. Permission to file a group return must be obtained in advance, and individual partners must authorize one partner to file and remit payment on their behalf. A group application must be filed on Form MTA-599. Estimated tax payments are reported by the partnership on Form MTA-5 and a group annual return is filed on Form MTA-505.
At least two partners must opt-in to a group filing by September 15 of each year, but other partners may opt-in before the first estimated tax payment is due on November 2, 2009. A partner can qualify to participate in the group return provided that (1) the partner has no other self-employment income, or (2) any other self-employment income from another partnership is reported on a group return by that partnership.
Note: Overpayments of group Commuter Tax cannot be refunded, but will be applied to next year’s estimated tax.

Non-resident of New York State:

The Commuter Tax is required on income from all business activities performed within the designated Districts, regardless of the residency of the individual/partner. However, partnerships doing business in the District are required to make estimated Commuter Tax payments on behalf of individual partners who are non-residents of New York State. Estimated payments are not required if (1) the estimated Commuter Tax for the non-resident partner is $300 or less; (2) the partnership files a group return for all partners (see above), or (3) the non-resident partner certifies that he will make his own Commuter estimated tax payments. The required forms are not yet available.

Deducting the Commuter Tax payments when filing individual federal or state income taxes:

Commuter Tax payments may be deducted as an itemized deduction along with other taxes such as state income or real property taxes on the individual’s federal income tax return. Payments cannot be deducted on state tax returns.

Penalties and interest for non-payment:

The same tax penalties that apply to underpayment of individual income tax and estimated individual income tax apply to the underpayment of commuter tax. Interest is charged on late estimated tax payments at the same rates that apply to personal income tax.

Avoid penalties:

To avoid a penalty for underpayment of MCTMT for the tax year your payments must be made on time and the total amount of MCTMT paid must be:
•at least 90% (66 2/3% for farmers and fisherman) of the amount of MCTMT due for the tax year; or
•100% (110% of that amount if you are not a farmer or fisherman and your net earnings from self-employment allocated to the Commuter Tax as shown on the prior year’s Commuter Tax return are more than $150,000).
Note: For tax year 2009, the second requirement does not apply. To compute the penalty yourself, use Form MTA-9, Underpayment of Estimated Metropolitan Commuter Transportation Mobility Tax, and its instructions, Form MTA-9-I. Enter the penalty on your return (Form MTA-6) and attach Form MTA-9 to it.

Final note:

It is important that self-employed individuals and partners in partnerships (or members in LLCs treated as partnerships) become familiar with this new tax and all of its requirements. All of the required payments and filings are due in addition to an individual’s federal and state personal income tax obligations. All of the payments and filings are due on dates different from any personal income tax filing date. Please reach out to our tax service team to learn how these rules affect you, and what you may need to do.

SMALL BUSINESS STOCK

SMALL BUSINESS STOCK – IS STOCK (COMMON OR PREFERRED, VOTING OR NONVOTING) OF A SMALL BUSINESS CORPORATION HELD SINCE ITS ISSUANCE (E.G., NOT ACQUIRED BY GIFT OR SUBSEQUENT PURCHASES) AND ISSUED FOR MONEY OR OTHER PROPERTY (NOT STOCK OR SECURITIES).

a.       Up to $50,000 ($100,000 if joint return) of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. The limit applies to Sec. 1244 stock held in all corporations. The limit is applied at the partner level, if applicable. The loss is considered to be from a trade or business for NOL purposes.

b.      To be classified as a small business corporation, the aggregate total amount of money and other property received by the corporation for stock, as a contribution to capital and as paid in surplus, cannot be in excess of $1 Million.

1)      However, even if the paid-in capital exceeds the threshold of $1 million, part of the stock (up to $1 million) may be designated by the corporation as qualifying for Sec. 1244 ordinary loss treatment.

c.        Any excess of basis over FMV of depreciated property at the time of its contribution in exchange for Sec. 1244 stock is treated as capital loss (to the extent thereof) before any other realized loss may be treated as ordinary.

1)      Basis in the stock is equal to the property’s basis in the hands of the transferor when contributed.

2)      When an owner of Sec. 1244 stock makes an additional capital contribution but does not receive any additional shares of stock, the additional investment cost is added to the basis of the previously held stock. However, the additional basis does not qualify for the Sec. 1244 ordinary loss treatment. Therefore, any future loss must be apportioned between the qualifying Sec. 1244 stock and the additional capital interest.

The difference between ordinary loss and a capital loss is the amount that you may deduct per year. Capital losses are deductible up to $3,000 per year with the difference carrying forward indefinitely. However, an ordinary loss has no $ limits.

http://www.taxproff.com/