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.