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Understanding Forms You Might Need for Your US Tax Return. Form W-2, Wage & Tax Statement

Ines Zemelman, EASep-15-2016

There is most likely a tax form tower sitting on the desk, or probably just thrown on your kitchen counter - forms from banks, lenders, employers, stockbrokers, and many others. For some people, the forms will just be handed over to your tax preparer; for others, you will take the information from the forms and input it into your favorite tax software - perhaps even uttering a few four-letter words as you go. Regardless of how you intend to complete your taxes, you probably don’t know all the details about what the many letters, numbers, and other data printed on the forms mean. This is one of several posts that will change that, and help you start to understand the multitude of tax forms.

W-2, Wage and Tax Statement

W-2 forms are sent to employees by employers. That seems like a simple statement, but it is significant, and not just for purposes of taxes. Employers have certain requirements for withholding, reporting, and insurance for people classified as employees. These requirements are different from the requirements for independent contractors.

When a W-2 must be issued is based solely on dollars - there are no other requirements. Not hours worked, nor the type of position - only dollars earned (or cash equivalent). The trigger number is USD 600. So, if an employer pays USD 600 or more to an employee in cash and/or equivalent compensation (including benefits that are taxable), they are required to send the employee a W-2. Also, if taxes, including Medicare and Social Security, are withheld by the employer, they must issue a W-2 regardless of the amount of payments to the employee.

The employer must prepare a total of six copies per employee of each W-2. It certainly is a great deal of paperwork. But, if you as an employee do not want to deal with the paper, and the employer has the right system, you can choose to get your W-2s electronically. Before an employer may send a W-2 electronically, you must explicitly consent to it. An employer is not allowed to send a W-2 to an employee electronically if they have not consented or if that consent has been revoked.

Copy A

Copy A of the W-2 is unique - it is printed using red ink, while the other copies are printed using black ink. This difference is intentional: these printed versions of the W-2 that can be purchased from office supply stores or printed out from various software are able to be scanned by government machines. Note that the version of the form that can be downloaded from the IRS’s website and printed is not in red. The government can fine an employer for using an incorrect version, so pay close attention to the form you are using (and don’t download and use this sample form: it isn’t in a scannable format!).

What Each Copy Is For

Copy A of the W-2 is sent to the Social Security Administration (SSA) together with Form W-3. Form W-3 discloses to the Social Security Administration the total from all the W-2s for that particular employer. The deadline for sending this information is February 28th, but if an employer e-files, the deadline is extended to March 31. (These dates are likely to change in 2017.) If there are any local, city, or state tax departments, Copy 1 is sent to them. The employer retains Copy D.

You, as the employee, will receive three copies. The employer must issue you the three copies no later than February 1. Copy B reports your income for federal tax purposes, and you usually file this copy with your printed federal tax return. (If you e-file, you must provide Copy B to your tax preparer, but they do not usually send it to the Internal Revenue Service.) Copy 2 reports your income for local, city, or state taxes, and you usually file this copy with your returns (if applicable) for these jurisdictions. You retain Copy C for your own records. It should be kept for a minimum of three years following the later of the date it is due, or when you actually file.

Taxpayer information is reported on the left side; financial information and codes are reported on the right. State and local tax information is reported on the bottom.

A Detailed Review of the Form’s Left Side

Here is a look at the left side of the form:

Box a

Box a reports your Social Security Number (SSN). It is important that you always ensure this is correct. If it isn’t correct, you must ask your employer for a corrected W-2. Errors are likely to slow down the IRS’s processing of the return. Also note that your Social Security Number will appear in its entirety in box a. The regulations allow for Social Security Numbers to be partially hidden on some forms, but not on the W-2 form.

Box b

Box b reports your employer’s Employer Identification Number (EIN). It is like your SSN, but identifies the employer.

Box c

Box c reports the employer’s address. Don’t be confused if this is not the address where you work - it is the employer’s legal address.

Box d

If the employer or the payroll department uses internal numbers for tracking, they may enter the control number in box d, but it is not required. This box may be blank.

Box e and Box f

These two boxes appear as a single block on the W-2. Box e contains the full name of the taxpayer. It should match the name on the card issued by the Social Security Administration. If it doesn’t match exactly, you should inquire with your employer since you might need a corrected W-2. Box f contains the taxpayer mailing address, so this is allowed to be a PO box. It may look a little different to you since the US Post Office prefers addresses without punctuation. If the address is not right on the W-2, let your employer know. They will not need to issue a new W-2, although they will likely want to update their records.

A Detailed Review of the Right Side of the Form

Here is a sample of the right side of the form:

Box 1

Box 1 tends to be the number that taxpayers pay the most attention to. It shows total taxable compensation including, but not limited to, tips, wages, prizes, and any fringe benefits that are taxable. Payroll deductions, pretax benefits, and retirement plan elective deferrals are not included. It is common for the amount in this box to be different from the amounts in box 2 and box 3.

Box 2

Total federal tax withholding from the pay associated with this W-2 is reported in Box 2. The amount in this box is based on the elections made your W-4, which includes your exemptions and additional withholding you requested. If you discover that this amount is either too high or too low, you will probably want to adjust the elections on your W-4 before the following year begins.

Box 3

The total wages that are subject to the Social Security withholding tax are in Box 3. This number is calculated prior to payroll deductions (if any), so this amount might be more than the Box 1 amount. It is also possible for this amount to be lower than the Box 1 amount if you are a high earner because the sum of box 3 and box 7 can’t be more than the wage base maximum for Social Security. In 2015, the maximum was USD 118,500.

Box 4

Total taxes withheld for Social Security for the reported year are in Box 4. Social Security withholding is calculated with a 6.2% flat rate, unlike federal taxes. The Box 4 amount is just the Box 3 amount multiplied by 6.2%. Also, since the maximum withholding for Social Security is 6.2% times the wage base maximum, the amount reported here will not be more than USD 7,347 for the 2015 tax year. In the example, the math is 0.062 x 50,000 = 3,100.

Box 5

Box 5 is the total wages that are subject to the Medicare tax. These taxes usually are not inclusive of pretax deductions, so Box 5 will include almost all taxable benefits. Because of this, and the fact there is not a Medicare tax cap (unlike for Social Security), means the Box 5 number might be greater than the numbers in Boxes 1 or 3. It is actually likely to be the largest amount on the W-2 form.

Box 6

The total Medicare taxes that were withheld are in Box 6. Medicare taxes, similar to taxes for Social Security, are calculated using flat rates. The rate for Medicare taxes is currently set at 1.45 percent. So, for the majority of taxpayers, the Box 6 number will simply be the Box 5 number multiplied by 0.0145. But, because of Obamacare, there may be additional tax withholding of 0.9%. This Obamacare tax withholding affects taxpayers with earnings greater than USD 200,000, without respect to wages paid to the employee by another job, or filing status. Because your employer is not likely to know your full financial status, it is possible for you to owe more Medicare tax than what was withheld, depending on compensation, income from self-employment, and filing status.

Box 7

Box 7 contains the amount of tips that the employer was aware of. A blank box simply means that tips were not reported to the employer - it does not mean you do not need to report the tips to the IRS.

Box 8

Box 8 reports allocated tips. These are tips that the employer determined should be attributed to you. These tips are treated as income.

Box 9

Box 9 will be blank. The box is shaded to help eliminate confusion since the requirement to report a number in Box 9 expired several years ago, but it has not been removed yet.

Box 10

The total amount of benefits paid underneath dependent care assistance programs is reported in Box 10. Any amounts under USD 5,000 paid out underneath qualified plans are treated as benefits that are not taxable. This amount includes the amount of all benefits for dependent care, including any amount over the excluded USD 5,000. If the amount is more than USD 5,000, the excess amount is also included in the Box 1 amount (or USD 2,500 for those married couples filing separately on their return).

Box 11

Amounts distributed from the employer’s non-qualified deferred compensation plan to you are reported in Box 11. This number is taxable. Be careful not to confuse it with any amounts that you contributed. Those are Box 12 amounts.

Box 12

Box 12 includes all sorts of codes and amounts, and not all is taxable. Here is a quick summary of all the codes:

  • Uncollected social security or RRTA tax on tips
  • Uncollected Medicare tax on tips (but not Additional Medicare Tax)
  • Taxable cost of group-term life insurance over $50,000 (included in your wages at boxes 1, 3 and 5)
  • Elective deferrals to a section 401(k) cash or deferred arrangement plan (including a SIMPLE 401(k) arrangement)
  • Elective deferrals under a section 403(b) salary reduction agreement
  • Elective deferrals under a section 408(k)(6) salary reduction SEP
  • Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan
  • Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan
  • Nontaxable sick pay
  • 20% excise tax on excess golden parachute payments
  • Substantiated employee business expense reimbursements
  • Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only)
  • Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (but not Additional Medicare Tax)(former employees only)
  • Excludable moving expense reimbursements paid directly to employee
  • Nontaxable combat pay
  • Employer contributions to an Archer MSA
  • Employee salary reduction contributions under a section 408(p) SIMPLE plan
  • Adoption benefits
  • Income from exercise of nonstatutory stock option(s)
  • Employer contributions (including employee contributions through a cafeteria plan) to an employee’s health savings account (HSA)
  • Deferrals under a section 409A nonqualified deferred compensation plan
  • Income under a nonqualified deferred compensation plan that fails to satisfy section 409A
  • Designated Roth contributions under a section 401(k) plan
  • Designated Roth contributions under a section 403(b) plan
  • HIRE exempt wages and tips (2010 only)
  • Cost of employer-sponsored health coverage
  • Designated Roth contributions under a governmental section 457(b) plan

The above example form includes two more common codes:

Code D - Elective deferrals are quite common. These amounts are usually included in Boxes 3 and 5, even when they are not included in Box 1.

Code DD - The cost for health insurance sponsored by the employer is reported under this code. This is a relatively new code. It is reportable to the IRS due to Obamacare, but the amount is not a taxable amount.

Box 13

This box contains three check boxes. The employer will indicate in Box 13 if you had received any sick pay from the employer’s insurance policy, if you had participated in the employer sponsored retirement plan at any time during the tax year, and if you have statutory employee status (those who have earnings for Medicare and Social Security tax purposes, but not subject to withholding for federal taxes).

Box 14

Box 14 is for anything that doesn’t have its own place in the form. Examples include nontaxable income, union dues, state insurance taxes for disability, and deductions for premiums for health insurance.

A Detailed Review of the Form’s Lower Portion

The lower portion of the W-2 shows local and state tax reporting.

Box 15

The employer’s state tax ID number and state will be in Box 15. If the state where you work does not have reporting requirements, this box (and Box 16 and Box 17) will not be populated. If you happened to have withholding in more than a single state, additional boxes will have entries.

Box 16

If state income tax applies, Box 16 indicates the taxable wages relevant to state tax. If you work and live where the state does not have income tax, Box 16 will not have an entry.

Box 17

If Box 16 reports wages, then Box 17 shows the total withholding for state taxes for the year. For states with a flat tax rate, you can make sure the withholding is right by taking the Box 16 amount and multiplying by the tax rate.

Box 18

Any other state, city, or local income taxes will be in the Box 18 amount. In the event there are wages that are subject to tax withholding in three or more localities or states, the employer will provide additional W-2s.

Box 19

If Box 18 shows wages, then any withholding will show up in the Box 19 amount.

Box 20

And, as you would expect, Box 20 shows the state, city, or local tax entity reported in Box 19.

In Summary

That’s all! You are supposed to have your W-2 form, with everything correctly reported, before February 1. If not, double check your desk, your mail, and your email. If that fails, contact your employer. And, if all else fails, contact the IRS. Employers are likely to get the forms out on time. Starting in January of 2016, the penalties for not filing correct and timely W-2s increases.

For information on other relevant tax forms, look for other articles in this series.

Zemelman
Ines Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887