All earned employee wages must be reported to the Internal Revenue Service (IRS) and state tax agencies regularly, with an annual submission to the Social Security Administration (SSA) through Form W-2. This essential tax form is issued to the employee at the end of each tax year and reflects total income earned between January 1 and December 31. The tax year for Form W-2 is always the calendar year, meaning if wages are paid in January for work completed in December, those wages are reported in the following year’s tax forms.
Key Information Included on Form W-2
Here’s a breakdown of the key details that Form W-2 contains:
Wages, Salaries, Tips (Box 1): This reflects the total taxable income an employee has earned, including any tips, bonuses, and wages. This figure is used for tax filings like the federal tax return and state filings.
Federal Income Tax Withheld (Box 2): This shows the total amount of federal income tax withheld from the employee’s wages throughout the year based on their Form W-4.
Social Security Wages (Box 3): The amount of an employee’s earnings subject to Social Security tax withholding, up to the wage base limit set by the IRS.
Social Security Tax Withheld (Box 4): This shows the actual amount of Social Security tax that was withheld from the employee’s wages during the year.
Medicare Wages (Box 5): Displays the earnings subject to Medicare tax withholding, which has no wage base limit.
Medicare Tax Withheld (Box 6): The total amount of Medicare tax withheld from the employee’s pay.
Dependent Care Benefits (Box 10): If applicable, this shows any benefits provided for dependent care, which may be partially tax-exempt.
Nonqualified Plans (Box 11): Indicates distributions from nonqualified plans that could affect the employee’s taxable income.
State Wages and Income Tax (Box 16): Reflects wages subject to state income tax withholding and the total amount of state tax withheld from those earnings.
Local Wages, Locality Name, and Local Income Tax (Boxes 18, 19, and 20): These boxes are relevant if the employee worked in an area subject to local income taxes, showing the local wages, locality name, and the amount of local income tax withheld.
Cost of Employer-Sponsored Health Coverage (Box 12, Code DD): This shows the total cost of employer-sponsored health insurance for informational purposes; it is not taxable.
Statutory Employee, Retirement Plan, and Third-Party Sick Pay (Checkboxes in Box 13): These checkboxes indicate if the employee is classified as a statutory employee, covered by a retirement plan, or received third-party sick pay.
Other Relevant Boxes:
Box 14 may be used to report other compensation plans like disability insurance or life insurance reimbursements.
Box 9 applies if you have certain deferrals or adjustments to taxable income.
Box 18 is important for tracking local wages and tax information if you work in a locality subject to taxes.
Why Accurate Form W-2 Reporting Matters
Accurate W-2 forms are essential for calculating tax withholdings and ensuring proper filing of tax returns. The amount of taxes withheld for federal, state, and local taxes, including Social Security and Medicare, are all reflected on this form, which employees use to complete their tax filing each year. Employers must ensure all compensation, deferrals, health savings accounts, and reimbursements are correctly reported to avoid tax deductions errors.
Each taxpayer needs to use the information in Form W-2 to file their federal tax return and other required forms. If you're self-employed or an independent contractor, different tax forms (like Form 1099) will apply, but Form W-2 remains the primary document for traditional employees.
Ensuring the right amount of tax withholding is crucial for both the employee and employer, as it impacts the total amount paid in taxes and any refunds or tax liabilities at the end of the tax year. Be sure to review your Form W-2 thoroughly, including boxes for employer identification number (EIN), health insurance, and local wages, to ensure all tax information is accurate before submitting your tax return.