Do you truly understand your W-2 earnings statement? A common question we get here at DirectPay Payroll Services is “Why don’t the gross wages on my last pay stub of the year match box 1 of my W-2”? The reason for this is simple, if your wages include non-taxable income, the non-taxable income will not be included on your W-2. Items such as 401K and Simple IRA contributions will be included in gross wages on your check stub, but will not be included as federal or state wages on your W-2. However, fully non-taxable items such as pretax health insurance will not show on your W-2 at all.
How about that lower region of your W-2? You know, the part of your W-2 with all the strange boxes, amounts and codes? What does all of that mean? Certain employer benefits and employee deductions need to be listed on your W-2 for reporting purposes, other items may just be listed as an informational memo. Below is a listing of the boxes and codes used on form W-2. You can also find this information on the back of your W-2 or at www.irs.gov
Box a—Employee’s social security number. Enter the number shown on the employee’s social security card. If the employee does not have a card, he or she should apply for one by completing Form SS-5, Application for a Social Security Card. The SSA lets you verify employee names and SSNs online or by telephone. For information about these free services, visit the Employer W-2 Filing Instructions & Information website at www.socialsecurity.gov/employer. If you have questions about using these services, call 1-888-772-6270 (toll free) to speak with an employer reporting specialist at the SSA. If the employee has applied for a card but the number is not received in time for filing, enter “Applied For” in box a on paper Forms W-2 filed with the SSA. If e-filing, enter zeros (000-00-0000 if creating forms online or 000000000 if uploading a file). Ask the employee to inform you of the number and name as they are shown on the social security card when it is received. Then correct your previous report by filing Form W-2c showing the employee’s SSN. If the employee needs to change his or her name from that shown on the card, the employee should call the SSA at 1-800-772-1213. If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. For more information, see Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs.
- Total wages, bonuses (including signing bonuses), prizes, and awards paid to employees during the year. See Calendar year basis on page 7.
- Total noncash payments, including certain fringe benefits. See Fringe benefits on page 5.
- Total tips reported by the employee to the employer (not allocated tips).
- Certain employee business expense reimbursements (see Employee business expense reimbursements on page 5).
- The cost of accident and health insurance premiums for 2%-or-more shareholder-employees paid by an S corporation.
- Taxable benefits from a section 125 (cafeteria) plan if the employee chooses cash.
- Employee contributions to an Archer MSA.
- Employer contributions to an Archer MSA if includible in the income of the employee. See Archer MSA on page 4.
- Employer contributions for qualified long-term care services to the extent that such coverage is provided through a flexible spending or similar arrangement.
- Taxable cost of group-term life insurance in excess of $50,000. See Group-term life insurance on page 5.
- Unless excludable under Educational assistance programs (see page 5), payments for non-job-related education expenses or for payments under a nonaccountable plan. See Pub. 970.
- The amount includible as wages because you paid your employee’s share of social security and Medicare taxes. See Employee’s social security and Medicare taxes paid by employer on page 5. If you also paid your employee’s income tax withholding, treat the grossed-up amount of that withholding as supplemental wages and report those wages in boxes 1, 3, 5, and 7. No exceptions to this treatment apply to household or agricultural wages.
- Designated Roth contributions made under a section 401(k) plan or under a section 403(b) salary reduction agreement. See Designated Roth contributions on page 5.
- Distributions to an employee or former employee from an NQDC plan (including a rabbi trust) or a nongovernmental section 457(b) plan.
- Amounts includible in income under section 457(f) because the amounts are no longer subject to a substantial risk of forfeiture.
- Payments to statutory employees who are subject to social security and Medicare taxes but not subject to federal income tax withholding must be shown in box 1 as other compensation. See Statutory employee on page 11.
- Cost of current insurance protection under a compensatory split-dollar life insurance arrangement.
- Employee contributions to a health savings account (HSA).
- Employer contributions to an HSA if includible in the income of the employee. See Health savings account (HSA) on page 5.
- Amounts includible in income under an NQDC plan because of section 409A. See Nonqualified deferred compensation plans on page 6.
- Payments made to former employees while they are on active duty in the Armed Forces or other uniformed services.
- All other compensation, including certain scholarship and fellowship grants (see page 6). Other compensation includes taxable amounts that you paid to your employee from which federal income tax was not withheld. You may show other compensation on a separate Form W-2. See Multiple forms on page 7.
Wages reported in box 3 include:
- Signing bonuses an employer pays for signing or ratifying an employment contract. See Rev. Rul. 2004-109, 2004-50 I.R.B 958, available at www.irs.gov/irb/2004-50_IRB/ar07.html.
- Taxable cost of group-term life insurance over $50,000 included in box 1. See Group-term life insurance on page 5.
- Cost of accident and health insurance premiums for 2%-or-more shareholder-employees paid by an S corporation, but only if not excludable under section 3121(a)(2)(B).
- Employee and nonexcludable employer contributions to an MSA or HSA. However, do not include employee contributions to an HSA that were made through a cafeteria plan. See Archer MSA on page 4 and Health savings account (HSA) on page 5.
- Employee contributions to a SIMPLE retirement account.
See SIMPLE retirement account on page 6.
- Adoption benefits. See Adoption benefits on page 3.
You paid your employee $140,000 in wages. Enter in box 3 (social security wages) 106800.00 but enter in box 5 (Medicare wages and tips) 140000.00. There is no limit on the amount reported in box 5. If the amount of wages paid was $106,800 or less, the amounts entered in boxes 3 and 5 would be the same.
An employer that amends its cafeteria plan to provide a grace period for dependent care assistance may continue to rely on Notice 89-111 by reporting in box 10 of Form W-2 the salary reduction amount elected by the employee for the year for dependent care assistance (plus any employer matching contributions attributable to dependent care). Also see Notice 2005-42, 2005-23 I.R.B. 1204, available at www.irs.gov/irb/2005-23_IRB/ar11.html.
If you made distributions and also are reporting any deferrals in box(es) 3 and/or 5, do not complete box 11. See Pub. 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for instructions on reporting these and other kinds of compensation earned in prior years. However, do not file Form SSA-131 if this situation applies but the employee will not be age 62 or older by the end of that year. Unlike qualified plans, NQDC plans do not meet the qualification requirements for tax-favored status for this purpose. NQDC plans include those arrangements traditionally viewed as deferring the receipt of current compensation. Accordingly, welfare benefit plans, stock option plans, and plans providing dismissal pay, termination pay, or early retirement pay are not NQDC plans. Report distributions from NQDC or section 457 plans to beneficiaries of deceased employees on Form 1099-MISC, not on Form W-2. Military employers must report military retirement payments on Form 1099-R.
Do not report special wage payments, such as accumulated sick pay or vacation pay, in box 11. For more information on reporting special wage payments, see Pub. 957.
On Copy A (Form W-2), do not enter more than four items in box 12. If more than four items need to be reported in box 12, use a separate Form W-2 to report the additional items (but enter no more than four items on each Copy A (Form W-2)). On all other copies of Form W-2 (Copies B, C, etc.), you may enter more than four items in box 12 when using an approved substitute Form W-2. See Multiple forms on page 7. Use the IRS code designated below for the item you are entering, followed by the dollar amount for that item. Even if only one item is entered, you must use the IRS code designated for that item. Enter the code using a capital letter(s). Use decimal points but not dollar signs or commas. For example, if you are reporting $5,300.00 in elective deferrals under a section 401(k) plan, the entry would be D 5300.00 (not A 5300.00 even though it is the first or only entry in this box). Report the IRS code to the left of the vertical line in boxes 12a through 12d and the money amount to the right of the vertical line. See the Form W-2 Reference Guide for Box 12 Codes on page 13. See also the detailed instructions below for each code.
Show the employee social security or Railroad Retirement Tax Act (RRTA) tax on all of the employee’s tips that you could not collect because the employee did not have enough funds from which to deduct it. Do not include this amount in box 4.
Show the taxable cost of group-term life insurance coverage over $50,000 provided to your employee (including a former employee). See Group-term life insurance on page 5. Also include this amount in boxes 1, 3 (up to the social security wage base), and 5.
Use these codes to show elective deferrals and designated Roth contributions made to the plans listed. Do not report amounts for other types of plans. See the example for reporting elective deferrals under a section 401(k) plan on page 10.
The amount reported as elective deferrals and designated Roth contributions is only the part of the employee’s salary (or other compensation) that he or she did not receive because of the deferrals or designated Roth contributions. Only elective deferrals and designated Roth contributions should be reported in box 12 for all coded plans; except, when using code G for section 457(b) plans, include both elective and nonelective deferrals.
For employees who were 50 years of age or older at any time during the year and made elective deferral and/or designated Roth “catch-up” contributions, report the elective deferrals and the elective deferral “catch-up” contributions as a single sum in box 12 using the appropriate code, and the designated Roth contributions and designated Roth “catch-up” contributions as a single sum in box 12 using the appropriate code.
If any elective deferrals, salary reduction amounts, or nonelective contributions under a section 457(b) plan during the year are makeup amounts under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) for a prior year, you must enter the prior year contributions separately. Beginning with the earliest year, enter the code, the year, and the amount. For example, elective deferrals of $2,250 for 2009 and $1,250 for 2010 under USERRA under a section 401(k) plan are reported in box 12 as follows:
D 09 2250.00, D 10 1250.00. A 2011 contribution of $7,000 does not require a year designation; enter it as D 7000.00. Report the code (and year for prior year USERRA contributions) to the left of the vertical line in boxes 12a through 12d.The following are not elective deferrals and may be reported in box 14, but not in box 12.
- Nonelective employer contributions made on behalf of an employee.
- After-tax contributions that are not designated Roth contributions, such as voluntary contributions to a pension plan that are deducted from an employee’s pay. See the instructions on page 11 in codes AA, BB, and EE for reporting designated Roth contributions.
- Required employee contributions.
- Employer matching contributions.
Even though the 2011 limit for elective deferrals and designated Roth contributions is $16,500, the employee’s total elective deferral amount of $18,300 is reported in box 12 with code D (D 18300.00). The designated Roth contribution is reported in box 12 with code AA (AA 1000.00). The employer must separately report the actual amounts of $18,300 and $1,000 in box 12 with the appropriate codes. The amount deferred in excess of the limit is not reported in box 1. The return of excess salary deferrals and excess designated contributions, including earnings on both, is reported on Form 1099-R.
The $600 voluntary after-tax contribution may be reported in box 14 (this is optional) but not in box 12. The $2,000 nonelective contribution and the $3,000 nonelective profit-sharing employer contribution are not required to be reported on Form W-2, but may be reported in box 14.
Check the “Retirement plan” box in box 13.
Do not report either section 457(b) or section 457(f) amounts that are subject to a substantial risk of forfeiture.
Be sure to include this amount in box 1 as wages. The employee will deduct the amount on his or her Form 1040.
Show any sick pay that was paid by a third-party and was not includible in income (and not shown in boxes 1, 3, and 5) because the employee contributed to the sick pay plan. Do not include nontaxable disability payments made directly by a state.
If you made excess “golden parachute” payments to certain key corporate employees, report the 20% excise tax on these payments. If the excess payments are considered to be wages, report the 20% excise tax withheld as income tax withheld in box 2.
Use this code only if you reimbursed your employee for employee business expenses using a per diem or mileage allowance and the amount that you reimbursed exceeds the amount treated as substantiated under IRS rules. See Employee business expense reimbursements on page 5.
Report in box 12 only the amount treated as substantiated (such as the nontaxable part). Include in boxes 1, 3 (up to the social security wage base), and 5 the part of the reimbursement that is more than the amount treated as substantiated.
If you provided your former employees (including retirees) more than $50,000 of group-term life insurance coverage for periods during which an employment relationship no longer exists, enter the amount of uncollected social security or RRTA tax on the coverage in box 12. Also see Group-term life insurance on page 5.
If you provided your former employees (including retirees) more than $50,000 of group-term life insurance coverage for periods during which an employment relationship no longer exists, enter the amount of uncollected Medicare tax or RRTA Medicare tax on the coverage in box 12. Also see Group-term life insurance on page 5.
If you are a military employer, report any nontaxable combat pay in box 12.
Show deferrals under a section 408(p) salary reduction SIMPLE retirement account. However, if the SIMPLE is part of a section 401(k) arrangement, use code D. If you are reporting prior year contributions under USERRA, see the TIP before Code D, on this page.
Show the total that you paid or reimbursed for qualified adoption expenses furnished to your employee under an adoption assistance program. Also include adoption benefits paid or reimbursed from the pre-tax contributions made by the employee under a section 125 (cafeteria) plan. However, do not include adoption benefits forfeited from a section 125 (cafeteria) plan. Report all amounts including those in excess of the $13,360 exclusion. For more information, see Adoption benefits on page 3.
Show the spread (that is, the fair market value of stock over the exercise price of option(s) granted to your employee with respect to that stock) from your employee’s (or former employee’s) exercise of nonstatutory stock option(s). Include this amount in boxes 1, 3 (up to the social security wage base), and 5.
This reporting requirement does not apply to the exercise of a statutory stock option, or the sale or disposition of stock acquired pursuant to the exercise of a statutory stock option. For more information about the taxability of employee stock options, see Pub. 15-B.
It is not necessary to show deferrals in box 12 with code Y. For more information, see Notice 2008-115. However, if you report these deferrals, show current year deferrals, including earnings during the year on current year and prior year deferrals. See Nonqualified deferred compensation plans on page 6.
Enter all amounts deferred (including earnings on amounts deferred) that are includible in income under section 409A because the NQDC plan fails to satisfy the requirements of section 409A. Do not include amounts properly reported on a Form 1099-MISC, corrected Form 1099-MISC, Form W-2, or Form W-2c for a prior year. Also, do not include amounts that are considered to be subject to a substantial risk of forfeiture for purposes of section 409A. For more information, see Regulations sections 1.409A-1 through 1.409A-6 and Notice 2008-115.
The amount reported in box 12 using code Z is also reported in box 1 and is subject to an additional tax reported on the employee’s Form 1040. See Nonqualified deferred compensation plans on page 6.
For information regarding correcting section 409A errors and related reporting, see Notice 2008-113, Notice 2010-6, and Notice 2010-80.
Use this code to report designated Roth contributions under a section 401(k) plan. Do not use this code to report elective deferrals under code D. See Designated Roth contributions on page 5.
Use this code to report designated Roth contributions under a section 403(b) plan. Do not use this code to report elective deferrals under code E. See Designated Roth contributions on page 5.
Use this code to report the cost of employer-sponsored health coverage. The amount reported with code DD is not taxable. See Interim relief for Form W-2 reporting of the cost of group health insurance on page 1.
Use this code to report designated Roth contributions under a governmental section 457(b) plan. Do not use this code to report elective deferrals under code G. See Designated Roth contributions on page 5.
- Statutory employee. Check this box for statutory employees whose earnings are subject to social security and Medicare taxes but not subject to federal income tax withholding. Do not check this box for common-law employees. There are workers who are independent contractors under the common-law rules but are treated by statute as employees. They are called statutory employees.
- A driver who distributes beverages (other than milk), or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning if the driver is your agent or is paid on commission.
- A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
- An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name if you also furnish specifications for the work to be done.
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.
For details on statutory employees and common-law employees, see section 1 in Pub. 15-A.
- Retirement plan. Check this box if the employee was an “active participant” (for any part of the year) in any of the following.
- A qualified pension, profit-sharing, or stock-bonus plan described in section 401(a) (including a 401(k) plan).
- An annuity plan described in section 403(a).
- An annuity contract or custodial account described in section 403(b).
- A simplified employee pension (SEP) plan described in section 408(k).
- A SIMPLE retirement account described in section 408(p).
- A trust described in section 501(c)(18).
- A plan for federal, state, or local government employees or by an agency or instrumentality thereof (other than a section 457(b) plan).
Generally, an employee is an active participant if covered by (a) a defined benefit plan for any tax year that he or she is eligible to participate in or (b) a defined contribution plan (for example, a section 401(k) plan) for any tax year that employer or employee contributions (or forfeitures) are added to his or her account. For additional information on employees who are eligible to participate in a plan, contact your plan administrator. For details on the active participant rules, see Notice 87-16, 1987-1 C.B. 446; Notice 98-49, 1998-2 C.B. 365; section 219(g)(5); and Pub. 590, Individual Retirement Arrangements (IRAs). You can find Notice 98-49 on page 5 of Internal Revenue Bulletin 1998-38 at www.irs.gov/pub/irs-irbs/irb98-38.pdf. Also see Notice 2000-30, which is on page 1266 of Internal Revenue Bulletin 2000-25 at www.irs.gov/pub/irs-irbs/irb00-25.pdf.