Tax Debt Help - Understanding Your W-2

Box 1: Wages, tips, and other compensation. Box 1 reports your total taxable wages for federal income tax purposes. This figure includes your wages, salary, tips you reported, bonuses, and other taxable compensation. Any taxable fringe benefits (such as group term life insurance) are also included in your Box 1 wages.

Box 2: Federal income tax withheld. Box 2 reports the total amount withheld from your paychecks for federal income taxes. This represents the amount of federal taxes you have paid-in throughout the year.

Box 3: Social Security wages. Box 3 reports the total amount of wages subject to Social Security taxes. For 2005, the Social Security tax is assessed on wages of $90,000 or less. If Box 3 shows an amount over $90,000, you will need to have your employer correct your W-2. If your total wages are under $90,000, then the amounts reported in Boxes 1 and 3 should be the same. Tips reported to your employer are not included in the Box 3 amount. Tip income is reported in Box 7. The amounts in Box 3 and Box 7 should equal either the amount in Box 1 or the $90,000 maximum wage base for Social Security taxes.

Box 4: Social Security tax withheld. Box 4 reports the total amount of Social Security taxes withheld from your paychecks. The Social Security tax is a flat tax rate of 6.2% for wages up to a maximum of $90,000. Wages above $90,000 are not subject to the Social Security tax. The maximum figure shown in Box 4 should be $5,580 ($90,000 maximum wage base times 6.5%). If you have two or more jobs during the year, and your total wages exceed $90,000, you may have excess Social Security taxes paid-in. You will claim the excess as a refund on Form 1040, Line 67.

Box 5: Medicare wages and tips. Box 5 reports the amount of wages subject to Medicare taxes. There is no maximum wage base for Medicare taxes. The amount shown in Box 5 may be larger than the amount shown in Box 1. Medicare wages includes any deferred compensation, 401k contributions, or other fringe benefits that are normally excluded from the regular income tax.

Box 6: Medicare tax withheld. Box 6 reports the amount of taxes withheld from your paycheck for the Medicare tax. The Medicare tax is a flat tax rate of 1.45% of your total Medicare wages.

Box 7: Social Security tips. Box 7 reports the amount of tip income that you reported to your employer. If you did not report tips to your employer, you will not have an amount in this box. The amounts in Box 7 and Box 3 should add up to the amount in Box 1, or the $90,000 maximum wage limit for Social Security taxes.

Box 8: Allocated tips. Box 8 reports any tip income that your employer thinks you may have earned, but failed to report. This amount is not included in the wages reported in Boxes 1, 3, 5, or 7. Instead, you must add this to your taxables wages on Form 1040 Line 7, and must calculate your Social Security and Medicare taxes on this tip income using IRS Form 4137 (PDF). Taxpayers with any amount shown in Box 8, Allocated Tips, should seek the advice of a tax preparer to figure out the best strategy for handling this situation. Employees with allocated tips must file Form 1040.

Box 9: Advance EIC payment. Box 9 reports any advance against your Earned Income Tax Credit paid to you by your employer. This only happens if you submitted IRS Form W-5 (PDF) requesting your employer to add a portion of your anticipated EIC to your paycheck. Advance EIC payments are repaid on Form 1040 as an additional tax payment, where it offsets the total amount of EIC you will receive as a tax refund. Employees with advance EIC payments must file Form 1040A or Form 1040.

Box 10: Dependent Care Benefits. Box 10 reports any amounts reimbursed for dependent care expenses, or the dollar value of dependent care services provided by your employer. Amounts under $5,000 are non-taxable benefits. Any amount over $5,000 is reported as taxable wages in Boxes 1, 3, and 5. Non-taxable benefits must be excluded from expenses claimed for the child and dependent care tax credit on IRS Form 2441 (PDF).

Box 11: Nonqualified Plans. Box 11 reports any amounts distributed to you from your employer's non-qualified deferred compensation plan or non-government Section 457 pension plan. The amount in Box 11 is already included as taxable wages in Box 1.

Box 12: Deferred Compensation and Other Compensation. There are several types of compensation and benefits that can be reported in Box 12. Box 12 will report a single letter or double letter code followed by a dollar amount. Here are the codes for Box 12.

Box 13: Check the Box. There are three check boxes in Box 13. Boxes will be checked off if any of these situations apply to you as an employee. Statutory employee means that you must report the wages from this W-2 (and any other W2 forms marked "statutory employee") on Form 1040 Schedule C. Your wages are not subject to income tax withholding (there will be a zero or blank amount in Box 2), but are subject to Social Security and Medicare taxes (so Boxes 3 through 6 will be filled out). Statutory employees are strongly urged to use tax preparation software to calculate their taxes. Retirement plan means that you participated in your employer's retirement plan during the year. This might be a 401k plan, profit-sharing plan, or pension plan. As a participate in a retirement plan, your ability to contribute to a tax-deductible traditional IRA may be limited. Third-party sick pay means that you received sick pay under your employer's third-party insurance policy. (Instead of receiving sick pay directly from your employer as part of your regular paycheck.) Sick pay is not included in your taxable wages.

Box 14: Other Tax Information. Your employer may report additional tax information in Box 14. If any amounts are reported, they will have a brief description of what the amounts are for. For example, union dues, employer-paid tuition assistance, health insurance premiums you paid, or after-tax contributions to a retirement plan will be reported here. Some employers report certain state and local taxes in Box 14, such as State Disability Insurance (SDI) premiums.

Box 15: State and State Employer's Identification. Box 15 reports your employer's state and state tax identification number. If you worked for the same employer in multiple states, there may be multiple lines of information.

Box 16: State wages. Box 16 reports the total amount of taxable wages earned in that state. If you worked for the same employer in multiple state, there may be multiple lines of information.

Box 17: State income tax withheld. Box 17 reports the total amount of state income taxes withheld from your paychecks for the wages reported in Box 16.

Box 18: Local wages. Box 18 reports the total amount of wages subject to local, city, or other state income taxes.

Box 19: Local income tax withheld. Box 19 reports the total amount of taxes withheld from your paychecks for local, city, or other state income taxes.

Box 20: Locality name. Box 20 provides a brief description of the local, city, or other state tax being paid. The description may identify a particular city, or may identify a state tax such as State Disability Insurance (SDI) payments.

S. Raines, Sr. Financial Advisor/Tax Preparer