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.