Decoding your W-2
Monday, January 27, 2014
Updated Feb. 21, 2018
Taxes are all about the numbers. But when it comes to Form W-2, the alphabet also is important.
The main thing you look for on your annual tax statement from your employer is, of course, the amount you earned, listed in boxes 1, 3 and 5, and the various taxes withheld in boxes 2, 4, 6 and, if you live in a state or city that collects tax on wages, in boxes 17 and 19.
But there is much more on this document.
You'll also find, for example, information on workplace benefits. Box 10 details amounts you were reimbursed from your dependent care flexible spending account or the dollar value of dependent care services provided by your employer. Amounts under $5,000 are non-taxable benefits.
And if you get tips as part of your employments, you'll want to pay close attention to box 7, which covers the tip income that you reported to your employer throughout the year, and box 8, where employers report any tip income allocated to employees.
Accounting for other compensation: But it's the W-2's box 12 that is most versatile and usually of most interest to employees who get an annual wage statement.
This box is where your boss reports the variety of other types of compensation, taxable and non-taxable, that you get from the company.
Since there are so many types of compensation that could go here, the Internal Revenue Service has devised an alphabetic system to explain the amount in box 12.
You'll find the codes in the fine print on the backs of the W-2 copies. Below, in a bit bigger typeface, are the box 12 codes and what they mean:
A — Uncollected Social Security or Railroad Retirement (RRTA) tax on tips. Include this tax on Form 1040.
B — Uncollected Medicare tax on tips. Include this tax on Form 1040.
C — Taxable cost of group-term life insurance over $50,000. This is included in boxes 1, 3 (up to the Social Security wage base; $127,200 in 2017 and $128,400 in 2018) and 5.
D — Elective deferrals to a 401(k) or SIMPLE retirement account. This amount is nontaxable.
E — Elective deferrals under a section 403(b) salary reduction agreement. This amount is nontaxable.
F — Elective deferrals under a section 408(k)(6) salary reduction SEP. This amount is nontaxable.
G — Elective deferrals and employer contributions, including nonelective deferrals, to a section 457(b) deferred compensation plan. This amount is nontaxable.
H — Elective deferrals to a section 501(c)(18)(D) pension plan. See the Form 1040 instructions for line 36 on how to deduct this amount.
J — Nontaxable sick pay.
K — Excise tax of 20 percent on excess golden parachute payments.
L — Nontaxable reimbursements of employee business expense reimbursements.
M — Uncollected Social Security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only). This amount should be included as part of your total tax on Form 1040.
N — Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only). This amount should be included as part of your total tax on Form 1040.
P — Excludable moving expense reimbursements paid directly to employee. This amount should be entered Form 3903 when calculating how much moving expenses to deduct
Q — Nontaxable combat pay. This amount is important when members of the military calculate their potential Earned Income Tax Credit (EITC) amount.
R — Employer contributions to your Archer Medical Savings Account (MSA). More on this health care coverage amount can be found in Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, and its instructions.
S — Employee salary reduction contributions under a section 408(p) SIMPLE plan.
T — Adoption benefits paid by your employer. More on this amount can be found in Form 8839, Qualified Adoption Expenses, and its instructions.
V — Income from exercise of nonstatutory stock options. This amount is included in boxes 1, 3 (up to the Social Security wage base) and 5. IRS Publication 525 and Schedule D instructions have details on reporting requirements for this amount.
W — Employer and employee contributions to a Health Savings Account established under a section 125 cafeteria plan. You report this amount on Form 8889, Health Savings Accounts (HSAs).
Y — Deferrals under a section 409A nonqualified deferred compensation plan.
Z — Income under section 409A on a nonqualified deferred compensation plan. This amount is also included in box 1 and is subject to an additional 20 percent tax plus interest.
AA — Roth 401(k) retirement plan contributions. Since these are made with after-tax money, the amount is included in the box 1 wages total.
BB — Roth 403(b) retirement plan contributions for employees of public schools, tax-exempt organizations and certain ministers. Since these are made with after-tax money, the amount is included in the box 1 wages total.
DD — Cost of employer-sponsored health coverage. This is for information only, as required by the Affordable Care Act, also known as Obamacare. The amount annotated DD is not taxable.
EE — Roth 457(b) retirement plan contributions for government employees. Since these are made with after-tax money, the amount is included in the box 1 wages total.
Four box 12 possibilities: You've probably noticed that there actually are four box 12 options, denoted as 12a through 12d.
In some cases, an employee may have more than four situations where information needs to be entered into box 12. In these cases, the employer can issue another W-2 to affected employees to cover all the applicable box 12 possibilities.
New code on some W-2s: The IRS also is expanding an effort to verify W-2 data by adding a new code to some W-2s. This, says Uncle Sam's tax collector, will help stop fraudulent tax refund claims.
A 16-digit code will show up on around 50 million W-2 forms issued for the 2016 tax year. This is an increase over the 2 million tax year 2015 W-2s that got the code.
If your W-2 has a code and you don't enter it when prompted by your tax software, don't worry. Since it's still in the test/pilot program phase, the IRS says it will process returns as usual anyway this year.
And note the reference to software. You only need to enter the code when you e-file, not if yo still do your taxes by hand on paper forms.
Whew! Take a breath.
Yes, it's a lot of data, especially if you have five or more tax situations covered by box 12.
But for most of us, only a few codes will apply.
Whatever your W-2 circumstances, take the time to read about what all the boxes mean and how they apply to your annual tax-filing task.
Missing your W-2: You were ready to file your 1040 as soon as the IRS opened its 2018 tax season doors on Jan. 29, except for one thing. You don't have your W-2.
Be patient. Companies have until that day to issue the forms.
But what happens if Jan. 31 passes and we're into mid-February and last year's wage statement still hasn't arrived?
That possibility is covered in today's Daily Tax Tip, which discusses what to do if you don't get a W-2.
You also might find these items of interest:
This is a very useful overview, Kay. I’ll be using it to help educate my tax clients plus demonstrate for tax preparers how some of the alphabet soup on a W-2 delivers key information. Even the individuals I work with who are becoming tax experts by studying for the Enrolled Agent exam must understand W-2 basics. They can use your reference here to find the elements sourced on a W-2 that are needed to answer sample exam questions in their course at FastForwardAcademy.com. I’ll need to make sure, however, that they don’t use your site to cheat themselves while studying. I’ve found that solutions to just about any tax issue are found somewhere in the archives of your blog.
Posted by: Brian Huber | Wednesday, January 29, 2014 at 10:20 AM
This was extremely helpful!
A great breakdown of a W-2 form. This is a great go to form when getting ready to file taxes, or first time tax payers.
Tailar McCarns
www.mbsaccountancy.com
Posted by: Tailar McCarns | Monday, January 27, 2014 at 04:06 PM